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 3x Fixed assets turnover 6x Debt-to-capital ratio 20% Total assets turnover 3x Times intereset earned 7x Profit margin 3.75% EBITDA coverage 9x Return on total assets 11.25% Inventory turnover 10x Return on common equity 16.10% Days sales outstanding 24 days Return on invested capital 14.40% aCalculate is based on 365-day year. Balance Sheet as of December 31, 2019 (millions of dollars) Cash and equivalents $78 Accounts payable $45 Accounts receivable 66 other current liabilities 11 Inventories 159 Notes payable 29 Total current assets $303 Total current liabilities $85 Long term debt 50 Total liabilities $135 Gross Fixed assets 225 common stock 114 Less depreciation 78 Retained earnings 201 Net fixed assets $147 Total stockholders's equity $315 Total assets $450 Total liabilities and equity $450 Income Statement for Year Ended December 31, 2019 (millions of dollars) Net sales $795.00 Cost of goods sold 660.00 Gross profit $135.00 Selling expenses 73.50 EBITDA $61.50 Depreciation expenses 12.00 Earning before interest and taxes (EBIT) $49.50 Intersest expenses 4.50 Earning befor taxes (EBT) $45.00 Taxes (25%) 11.25 Net income $33.75 a. Calculate the ratios you think would be useful in this analysis. b. Construct a DuPont equation, and compare the company’s ratios to the industry average ratios. c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?

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Chapter15: Capital Investment Analysis

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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	3x	Fixed assets turnover	6x
Debt-to-capital ratio	20%	Total assets turnover	3x
Times intereset earned	7x	Profit margin	3.75%
EBITDA coverage	9x	Return on total assets	11.25%
Inventory turnover	10x	Return on common equity	16.10%
Days sales outstanding	24 days	Return on invested capital	14.40%

^aCalculate is based on 365-day year.
Balance Sheet as of December 31, 2019 (millions of dollars)

Cash and equivalents	$78	Accounts payable	$45
Accounts receivable	66	other current liabilities	11
Inventories	159	Notes payable	29
Total current assets	$303	Total current liabilities	$85
		Long term debt	50
		Total liabilities	$135
Gross Fixed assets	225	common stock	114
Less depreciation	78	Retained earnings	201
Net fixed assets	$147	Total stockholders's equity	$315
Total assets	$450	Total liabilities and equity	$450

Income Statement for Year Ended December 31, 2019 (millions of dollars)

Net sales	$795.00
Cost of goods sold	660.00
Gross profit	$135.00
Selling expenses	73.50
EBITDA	$61.50
Depreciation expenses	12.00
Earning before interest and taxes (EBIT)	$49.50
Intersest expenses	4.50
Earning befor taxes (EBT)	$45.00
Taxes (25%)	11.25

Net income

$33.75

a. Calculate the ratios you think would be useful in this analysis.
b. Construct a DuPont equation, and compare the company’s ratios to the
industry average ratios.
c. Do the balance sheet accounts or the income statement figures seem to
be primarily responsible for the low profits?
d. Which specific accounts seem to be most out of line relative to other firms in the industry ?
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? How might you correct for such potential problems ?

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