Question

DuPONT ANALYSIS

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	3.34x		Fixed assets turnover	7.44x
Debt-to-capital ratio	19.28%		Total assets turnover	3.70x
Times interest earned	35.45x		Profit margin	12.64%
EBITDA coverage	25.78x		Return on total assets	46.40%
Inventory turnover	9.82x		Return on common equity	73.76%
Days sales outstandinga	17.65 days		Return on invested capital	54.79%

^aCalculation is based on a 365-day year.

Balance Sheet as of December 31, 2016 (Millions of Dollars)
Cash and equivalents	$25		Accounts payable	$16
Accounts receivables	20		Other current liabilities	9
Inventories	60		Notes payable	14
Total current assets	$105		Total current liabilities	$39
			Long-term debt	11
			Total liabilities	$50
Gross fixed assets	82		Common stock	43
Less depreciation	32		Retained earnings	62
Net fixed assets	$50		Total stockholders' equity	$105
Total assets	$155		Total liabilities and equity	$155

Income Statement for Year Ended December 31, 2016 (Millions of Dollars)
Net sales	$310.0
Cost of goods sold	201.5
Gross profit	$108.5
Selling expenses	21.7
EBITDA	$86.8
Depreciation expense	8.7
Earnings before interest and taxes (EBIT)	$78.1
Interest expense	1.3
Earnings before taxes (EBT)	$76.8
Taxes (40%)	30.7
Net income	$46.1

1. Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places.

   	Firm	Industry Average
   Current ratio	x	3.34x
   Debt to total capital	%	19.28%
   Times interest earned	x	35.45x
   EBITDA coverage	x	25.78x
   Inventory turnover	x	9.82x
   Days sales outstanding	days	17.65days
   Fixed assets turnover	x	7.44x
   Total assets turnover	x	3.70x
   Profit margin	%	12.64%
   Return on total assets	%	46.40%
   Return on common equity	%	73.76%
   Return on invested capital	%	54.79%

2. Construct a DuPont equation for the firm and the industry. Do not round intermediate steps. Round your answers to two decimal places.

   	Firm	Industry
   Profit margin	%	12.64%
   Total assets turnover	x	3.70x
   Equity multiplier	x	x

3. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?
   1. 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.
   2. 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.
   3. 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.
   4. 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.
      
   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.
4. 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: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit Margin.
   2. 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.
   3. 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.
   4. 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.
      
   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.
5. 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.
   2. 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.
   3. 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.
   4. 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.
      
   
   How might you correct for such potential problems?
   1. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business.
   2. 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.
   3. 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.
   4. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques.
   If the firm had seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted.It is possible to correct for such problems by using average rather than end-of-period financial statement information.

Answer 1

As per rules I am answering the first 4 subparts of the question

Sub Part	Ratio	Formula
1	Current	Current Assets/Current liabilities	2.69
2	Debt to total capital	Interest bearing Debt/(Interest bearing debt+Equity)	0.09
3	Times interest earned	EBIT/Interest	60.08
4	EBITDA coverage	EBITDA/Interest	66.77

Workings

Book1- Excel AutoSave olf) Sign in Commentss O Tell me what you want to do Share File Home Insert Draw Page Layout Formulas Data Review View Help Σ ΥΟ Insert A A General Calibri 11 Ce 5Delete Sort & Find & Filter Select Conditional Format as A = E Cell Paste в I % Format BIU 00 000 T T T Table Styles Formatting г. Clipboard Alignment Number Styles Cells Editing Font Г. г. fix Interest bearing Debt/(Interest bearing debt+Equity) СЗ X A В C D E F G 1 Sub Part Ratio Formula -105/39 Interest bearing Debt/(Interest bearing debt+Equity)=11/(11+105) = 78.1/1.3 Current Assets/Current liabilities 2 1 Current 3 2 Debt to total capital Times interest earned EBIT/Interest 4 3 EBITDA coverage EBITDA/Interest =86.8/1.3 5 4 6 7 8 9 10 11 12 13 14 15 16 17 choot hoot1 choot? Shootd