Problem 4-23. Du Pont analysis

A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the extended Du Pont 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	2X	Fixed assets turnover	6X
Debt/total assets	30%	Total assets turnover	3X
Times interest earned	7X	Profit margin on sales	3%
EBITDA coverage	9X	Return on total assets	9%
Inventory turnover	10X	Return on common equity	12.86%
Days sales outstandinga	24 days

aCalculation is based on a 365-day year.

Balance Sheet as of December 31, 2005 (Millions of Dollars)
Cash and equivalents	$78		Accounts payable	$45
Net receivables	66		Notes payable	45
Inventories	159		Other current liabilities	21
Total current assets	303		Total current liabilities Long-term debt Total liabilities	111 24 135
Gross fixed assets	225
Less depreciation	78		Common stock	114
Net fixed assets	147		Retained earnings	201
Total assets	450		Total stockholders' equity Total liabilities and equity	315 450

Income Statement for Year Ended December 31, 2005 (Millions of Dollars)
Net sales	795
Cost of goods sold	660
Gross profit	135
Selling expenses	73.5
EBITDA	61.50
Depreciation expense	12.0
Earnings before interest and taxes (EBIT)	49.5
Interest expense	4.5
Earnings before taxes (EBT)	45.0
Taxes (40%)	18.0
Net income	27.0

Calculate those ratios that you think would be useful in this analysis. Round your answers to two decimal places.

	Firm	Industry Average
Current ratio
Debt to total assets
Times interest earned
EBITDA coverage
Inventory turnover
DSO
F.A. turnover
T.A. turnover
Profit margin
Return on total assets
Return on common equity

Construct an extended Du Pont equation, and compare the company's ratios to the industry average ratios. Round your answers to two decimal places.

	Firm	Industry
Profit margin
Total assets turnover
Equity multiplier