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4-24 6x 3x 66 DUPONT ANALYSIS A firm has been experiencing low profitability in recent years. Per- form an analysis of the fi

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please answer A to E please
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Answer #1

solution a : Ratio Analysis :

RATIO COMPANY
Current Ratio 3.56
Debt to Total Capital 20.05 %
Times interest earned 11
EBITDA COVERAGE 9.46
INVENTORY T/O 5
Days sales outstanding 30.28 days
FIXED ASSEST T/O 5.41
TOTAL ASSEST T/O 1.77
PROFIT MARGIN 3.396 %
RETURN ON TOTAL ASSEST 11 %
RETURN ON COMMON EQUITY 8.57 %
RETURN ON INVESTED CAPITAL 6 %

EXPLANATION :

Current Ratio = current assets / current liabilities

= 303/85

= 3.56

Debt to Total Capital = total Debt / total invested capital

=29 + 50 / ( 29 + 50 + 315)

=20.05 %

Times interest earned = EBIT /INTEREST

=49.5/4.50

= 11 TIMES

EBITDA COVERAGE =(EBIT + LEASE PAYMENT ) /(INTEREST +PRINCIPAL PAYMENT + LEASE PAYMENT)

= 61.5 /(4.50 + 2)
=9.46 Times

INVENTORY T/O = SALES / INVENTORIES

= 795 /159

=5 times

Days sales outstanding = Accounts Receivable /Total Credit sales

=66/( 795/365)

= 66/2.18

=30.28 days

FIXED ASSEST T/O = NET SALES /NET FIXED ASSEST

= 795 /147

= 5.41 TIMES

TOTAL ASSEST T/O =NET SALES / TOTAL ASSEST

= 795 /450

=1.77 TIMES

PROFIT MARGIN = NET INCOME /SALES

=27 /795

=3.396 %

RETURN ON TOTAL ASSEST = net income /TOTAL ASSEST

=27 /450

= 6 %

RETURN ON COMMON EQUITY = NET INCOME / EQUITY

=27 /315

= .0857 OR 8.57 %

RETURN ON INVESTED CAPITAL = NET INCOME / TOTAL LIABILITY & EQUITY

=27 /450

= .06 OR 6 %

SOLUTION 2 : construction of Du Pont Equation :

DU PONT EQUATION = PROFIT MARGIN X TOTAL ASSEST T/O X EQUITY MULTIPLIER*

=3.396 % X1.77 X1.4286*

= 8.57 %

* EQUITY MULTIPLIER = TOTAL ASSETS /TOTAL COMMON EQUITY

= 450/315

=1.4286

RATIO COMPANY INDUSTRY AVERAGE PERFORMANCE
Current Ratio 3.56 3 GOOD
Debt to Total Capital 20.05 % 20 % GOOD
Times interest earned 11 7 GOOD
EBITDA COVERAGE 9.46 9 GOOD
INVENTORY T/O 5 10 BAD
Days sales outstanding 30.28 days 24 days BAD
FIXED ASSEST T/O 5.41 6 BAD
TOTAL ASSEST T/O 1.77 3 BAD
PROFIT MARGIN 3.396 % 3 GOOD
RETURN ON TOTAL ASSEST 11 % 9 % GOOD
RETURN ON COMMON EQUITY 8.57 % 12.86% BAD
RETURN ON INVESTED CAPITAL 6 % 11.50 % BAD

SOLUTION C& D

Continuing fromthe DuPont analysis , we can see that profit margin and equity multiplier of the company are performing good relative to the industry.This means the company is employing a good level of debt relative to the industry and its cost efficiency is good..

However , the rate of return on equity and assets and total assets turnover are way below the industry average. This would indicate that the company has more assest then it needs, or the assest aren't performing good as they should have .Thus the balance sheet accounts would seems to be primarily responsible for the low return ratios.

The specific accounts for this would be inventories and accounts receivable.

Upon further analysis we can see that the company is indeed holding more inventory and accounts receivable than necessary .inventory t/o 5x is twice lower than industry average.

solution e:

Sesonal sales pattern or massive growth rate in a year might affectthe validity of the ratio analysis,as this might significantly skew important income statement and balance sheet amounts used in such analysis.

using periodic averages of affected accounts such as inventory and receivable when computing turnover ratios might help compensate for such changes.

(please like it ....and you have any query related to this just ask me...all the best champ)

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