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 $3 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 | 3.62x | Fixed assets turnover | 5.36x | |
Debt-to-capital ratio | 16.99% | Total assets turnover | 3.02x | |
Times interest earned | 28.62x | Profit margin | 8.80% | |
EBITDA coverage | 18.64x | Return on total assets | 26.00% | |
Inventory turnover | 9.28x | Return on common equity | 38.44% | |
Days sales outstandinga | 23.12 days | Return on invested capital | 30.63% |
aCalculation is based on a 365-day year.
Balance Sheet as of December 31, 2016 (Millions of Dollars) | ||||
Cash and equivalents | $59 | Accounts payable | $31 | |
Accounts receivables | 45 | Other current liabilities | 10 | |
Inventories | 125 | Notes payable | 35 | |
Total current assets | $229 | Total current liabilities | $76 | |
Long-term debt | 17 | |||
Total liabilities | $93 | |||
Gross fixed assets | 157 | Common stock | 97 | |
Less depreciation | 38 | Retained earnings | 158 | |
Net fixed assets | $119 | Total stockholders' equity | $255 | |
Total assets | $348 | Total liabilities and equity | $348 |
Income Statement for Year Ended December 31, 2016 (Millions of Dollars) | |
Net sales | $580.0 |
Cost of goods sold | 411.8 |
Gross profit | $168.2 |
Selling expenses | 52.2 |
EBITDA | $116.0 |
Depreciation expense | 16.8 |
Earnings before interest and taxes (EBIT) | $99.2 |
Interest expense | 2.6 |
Earnings before taxes (EBT) | $96.6 |
Taxes (40%) | 38.6 |
Net income | $58.0 |
Firm | Industry Average | |
Current ratio | x | 3.62x |
Debt to total capital | % | 16.99% |
Times interest earned | x | 28.62x |
EBITDA coverage | x | 18.64x |
Inventory turnover | x | 9.28x |
Days sales outstanding | days | 23.12days |
Fixed assets turnover | x | 5.36x |
Total assets turnover | x | 3.02x |
Profit margin | % | 8.80% |
Return on total assets | % | 26.00% |
Return on common equity | % | 38.44% |
Ans. 1 | Current ratio = Total current assets / Total current liabilities | |||||
$229 / $76 | ||||||
3.01 : 1 | ||||||
Ans. 2 | Debt to Total capital ratio = Total liabilities / Total Stockholder's equity * 100 | |||||
$93 / $255 * 100 | ||||||
36.47% | ||||||
Ans. 3 | Time interest earned = Earnings before interest and taxes / Interest expenses | |||||
$99.2 / $2.6 | ||||||
38.15 | times | |||||
Ans. 4 | EBITDA coverage = EBITDA / Interest expenses | |||||
$116 / $2.6 | ||||||
44.62 | times | |||||
Ans. 5 | Inventory turnover = Cost of goods sold / Inventory | |||||
$411.8 / $125 | ||||||
3.29 | times | |||||
Ans. 6 | Days sales uncollected = Accounts receivables / Net credit sales * No. of days in year | |||||
$45 / $580 * 365 | ||||||
28.32 | times | |||||
Ans. 7 | Fixed assets turnover = Net sales / Fixed assets | |||||
$580 / $119 | ||||||
4.87 | times | |||||
Ans. 8 | Total assets turnover = Net sales / Total assets | |||||
$580 / $348 | ||||||
1.67 | times | |||||
Ans. 9 | Profit margin = Net income / Net sales * 100 | |||||
$58 / $580 * 100 | ||||||
10% | ||||||
Ans. 10 | Return on total assets = Net income / Total assets * 100 | |||||
$58 / $348 * 100 | ||||||
16.67% | ||||||
Ans. 11 | Return on common equity = Net income / Total stockholder's equity * 100 | |||||
$58 / $255 * 100 | ||||||
22.75% | ||||||
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 $3 million...
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