Industry Average Ratios Current ratio: 3x Fixed assets turnover 8x Debt-to-capital ratio 20% Total assets turnover 4x Times interest earned 4x Profit margin 4.50% EBITDA coverage 8x Return on total assets 18.00% Inventory turnover 10 x Return on common 19.90% equity Days sales 18 days Return on invested 18.10% outstanding capital "Calculation is based on a 365-day year. Balance Sheet as of December 31, 2019 (Millions of Dollars) Cash and equivalents $ 64 Accounts payable $ 38 Accounts receivables 56 Other current liabilities 11 Inventories 150 Notes payable 38 Total current assets $270 Total current liabilities $ 87 Long-term debt 26 Total liabilities $113 Gross fixed assets 191 Common stock 86 Less depreciation 86 Retained earnings 176 Net fixed assets $105 Total stockholders' equity $262 $375 Total liabilities and equity $375 Total assets Income Statement for Year Ended December 31, 2019 (Millions of Dollars) Net sales $ 775.00 Cost of goods sold 620,00 Gross profit $ 155.00 Selling expenses 84.50 EBITDA $ 70.50 Depreciation expense 14.00 Earnings before interest and taxes (EBIT) $ 56.50 Interest expense 6.50 Earnings before taxes (EBT) $ 50.00 Taxes (25%) 12.50 Net income 37.50 the following ratios. Do not round intermediate calculatione Round un a. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places. Current ratio Debt to total capital Times interest earned EBITDA coverage Inventory turnover Days sales outstanding Fixed assets turnover Total assets turnover Profit margin Return on total assets Firm Industry Average 3x % 20% 4X 8x 10 days 18 days x 8x x 4x % 4.50% % 18.00% 19,90 % 18.10% Return on common equity Return on invested capital % % b. Construct a DuPont equation for the firm and the industry. Do not round intermediate calculations. Round your answers to two decimal places. Profit margin Total assets turnover Firm % Industry 4,50% 4x Equity multiplier 2. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? 1. The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment in assets 11. The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than average investment in assets. 111. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales sh higher given the present level of assets, or the firm is carrying more assets than it needs to support its sales. IV. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales sho lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales. V. Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages. Either assets should be higher given the present level of sales, or the firm in carrying less assets than it needs to support its sales. -Select- d. Which specific accounts seem to be most out of line relative to other firms in the industry? 1. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on Equity 1. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Total Asset Turnover, Return on Assets, and Return on Equity 111. The accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Return on Equity IV. The accounts which seem to be most out of line indude the following ratios: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit Margin V. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, and Return on Equity e. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? 1. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations. 11. Seasonal sales patterns would most likely affect the profitability raties, with little effect on asset management ratios, Rapid growth would not substantially affect your analysis. 11. Rapid growth would most likely affect the coverage ratios, with little effect on asset management ratios. Seasonal sales patterns would not substantially affect your analysis. IV. Seasonal sales patterns would most likely affect the liquidity ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis. V. If the firm had sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted. How might you correct for such potential problems? 1. There is no need to correct for these potential problems since you are comparing the calculated ratios to the ratios of firms in the same industry group. 11. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques 111. It is possible to correct for such problems by using average rather than end-of-period financial statement information IV. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business. V. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in the same industry group over an extended period. A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $2 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows: Industry Average Ratios Current ratio 3x Fixed assets turnover Debt-to-capital ratio 20 % Total assets turnover 4x Times interest eamed 4x Profit margin 4.50% EBITDA coverage Return on total assets 18.00% Inventory turnover 10x Return on common equity 19.90% Days sales outstanding 18 days Return on invested capital 16.10% "Calculation is based on a 365-day year Balance Sheet as of December 31, 2019 (Millions of Dollars) Cash and equivalents 164 Accounts payable $ 38 Accounts receivables 56 Other current liabilities 11 Inventories 150 Notes payable 38 Total current assets $270 Total current liabilities $07 Long-term debt 26 Total liabilities $113 Gross fixed assets 191 Common stock 86 Less depreciation 86 Retained earnings 176 Net fixed assets $105 Total stockholders' equity $262 Total assets $375 Total liabilities and equity $375 Income Statement for Year Ended December 31, 2019 (Millions of Dollars) Net sales 775.00 Cost of goods sold 620.00 Gross profit $ 155.00 Selling expenses 84.50 EBITDA 70.50 Depreciation expense 14.00 Earnings before interest and taxes (EBIT) $ 56.50 Interest expense 6.50 Earnings before taxes (EBT) 50.00 Taxes (25%) 12.50 Net income 37.50 a. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places. Current ratio Debt to total capital Firm x % Industry Average 3x 20% Times interest earned EBITDA coverage Inventory turnover Days sales outstanding Fixed assets turnover Total assets turnover Profit margin Return on total assets. x x x days x x % % 4 x 8x 10 x 18 days 8x 4x 4.50% 18.00% 19.90% 18.10% Return on common equity Return on invested capital % % b. Construct a DuPont equation for the firm and the industry. Do not round intermediate calculations. Round your answers to two decimal places. Profit margin Total assets turnover Equity multiplier 000. Firm x x % Industry 4.50% 4x c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? 1. The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment in assets. 11. The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than average investment in assets. 11. Analysis of the extended DuPont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales should be higher given the present level of assets, or the firm is carrying more assets than it needs to support sales. TV Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales should be lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales. V. Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages. Either assets should be higher given the present level of sales, or the firm is carrying less assets than it needs to support its sales Select Which specific accounts seem to be most out of line relative to other firms in the industry? 1. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on Equity. 11. The accounts which seem to be most out of line include the following ratios: Inventory Tumover, Days Sales Outstanding, Total Asset Turnover, Return on Assets, and Return on Equity. 11. The accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Return on Equity. IV. The accounts which seem to be most out of line include the following ratios: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit Margin. V. The accounts which seem to be most out of line include the following ratios: Times Interest Eamed, Total Asset Turnover, Profit Margin, Return on Assets, and Return on Equity. Select If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? 1. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations. 11. Seasonal sales patterns would most likely affect the profitability ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis. III. Rapid growth would most likely affect the coverage ratios, with little effect on asset management ratios. Seasonal sales patterns would not substantially affect your analysis. TV. Seasonal sales patterns would most likely affect the liquidity ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis. V. If the firm had sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted. How might you correct for such potential problems? 1. There is no need to correct for these potential problems since you are comparing the calculated ratios to the ratios of firms in the same industry group. 11. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques. 11. It is possible to correct for such problems by using average rather than end-of-period financial statement information. IV. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business. V. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in the same industry group over an extended period Select v A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $2 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows: Industry Average Ratios Current ratio 3x Fixed assets turnover 8x Debt-to-capital ratio 20% Total assets turnover 4x Times interest earned 4x Profit margin 4.50% EBITDA coverage 8x Return on total assets 18.00% Inventory turnover 10x Return on common equity 19.90% Days sales 18 days outstanding Return on invested capital 18.10% "Calculation is based on a 365-day year. Balance Sheet as of December 31, 2019 (Millions of Dollars) Cash and equivalents $ 64 Accounts payable $ 38 Accounts receivables 56 Other current liabilities. 11 Inventories 150 Notes payable 38 Total current assets $270 Total current liabilities $ 87 Long-term debt 26 Total liabilities $113 Gross fixed assets 191 Common stock 86 Less depreciation 86 Retained earnings 176 Het fixed assets $105 Total stockholders' equity $262 Total assets $375 Total liabilities and equity $375 Income Statement for Year Ended December 31, 2019 (Millions of Dollars) Net sales Cost of goods sold $ 775.00 620.00 Gross profit $ 155.00 Selling expenses 84.50 EBITDA 70.50 Depreciation expense 14.00 Earnings before interest and taxes (EBIT) $ 56.50 Interest expense 6.50 Earnings before taxes (EBT) $ 50.00 Taxes (25%) 12.50 Net income a. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places. $ 37.50 Firm Industry Average Current ratio Debt to total capital 3x % 20% Times interest earned EBITDA coverage Inventory turnover Days sales outstanding Fixed assets turnover 4x x x 8x 10x days. 18 days. 8x Total assets turnover 4x Profit margin % 4.50% Return on total assets % 18.00% Return on common equity % 19.90% Return on invested capital % 18.10% b. Construct a DuPont equation for the firm and the industry. Do not round intermediate calculations. Round your answers to two decimal places. Profit margin Total assets turnover Equity multiplier Firm % Industry 4.50% 4x c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? I. The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment in assets. II. The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low RO is mainly a result of an lower than average investment in assets. III. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales should be higher given the present level of assets, or the firm is carrying more assets than it needs to support its sales. IV. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales should be lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales. V. Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages. Either assets should be higher given the present level of sales, or the firm is carrying less assets than it needs to support its sales. Select d. Which specific accounts seem to be most out of line relative to other firms in the industry? 1. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on Equity. II. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Total Asset Turnover, Return on Assets, and Return on Equity. III. The accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Return on Equity, fwork Sales Outstanumy, and Retum on equity. IV. The accounts which seem to be most out of line include the following ratios: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit Margin. V. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, and Return on Equity. Select v e. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? 1. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations. II. Seasonal sales patterns would most likely affect the profitability ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis. III. Rapid growth would most likely affect the coverage ratios, with little effect on asset management ratios. Seasonal sales patterns would not substantially affect your analysis. IV. Seasonal sales patterns would most likely affect the liquidity ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis. V. If the firm had sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted. -Select v How might you correct for such potential problems? I. There is no need to correct for these potential problems since you are comparing the calculated ratios to the ratios of firms in the same industry group. II. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques. III. It is possible to correct for such problems by using average rather than end-of-period financial statement information. IV. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business. V. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in the same industry group over an extended period. -Select