DuPONT ANALYSIS

A firm has been experiencing low profitability in recent years.Perform an analysis of the firm's financial position using theDuPont equation. The firm has no lease payments but has a $2million sinking fund payment on its debt. The most recent industryaverage ratios and the firm's financial statements are asfollows:

Industry Average Ratios
Current ratio	3.17x		Fixed assets turnover	6.73x
Debt-to-capital ratio	20.40%		Total assets turnover	3.78x
Times interest earned	22.72x		Profit margin	8.24%
EBITDA coverage	19.80x		Return on total assets	30.69%
Inventory turnover	12.59x		Return on common equity	47.29%
Days sales outstandinga	23.7 days		Return on invested capital	38.4%

^aCalculation is based on a 365-day year.

Balance Sheet as of December 31, 2016(Millions of Dollars)
Cash and equivalents	$50		Accounts payable	$30
Accounts receivables	44		Other current liabilities	14
Inventories	83		Notes payable	33
Total current assets	$177		Total current liabilities	$77
			Long-term debt	14
			Total liabilities	$91
Gross fixed assets	124		Common stock	77
Less depreciation	26		Retained earnings	107
Net fixed assets	$98		Total stockholders' equity	$184
Total assets	$275		Total liabilities and equity	$275

Income Statement for Year Ended December31, 2016 (Millions of Dollars)
Net sales	$550.0
Cost of goods sold	412.5
Gross profit	$137.5
Selling expenses	38.5
EBITDA	$99.0
Depreciation expense	9.4
Earnings before interest and taxes (EBIT)	$89.6
Interest expense	2.8
Earnings before taxes (EBT)	$86.8
Taxes (40%)	34.7
Net income	$52.1

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

   	Firm	Industry Average
   Current ratio	x	3.17x
   Debt to total capital	%	20.40%
   Times interest earned	x	22.72x
   EBITDA coverage	x	19.80x
   Inventory turnover	x	12.59x
   Days sales outstanding	days	23.7days
   Fixed assets turnover	x	6.73x
   Total assets turnover	x	3.78x
   Profit margin	%	8.24%
   Return on total assets	%	30.69%
   Return on common equity	%	47.29%
   Return on invested capital	%	38.40%

2. Construct a DuPont equation for the firm and the industry. Donot round intermediate steps. Round your answers to two decimalplaces.

   	Firm	Industry
   Profit margin	%	8.24%
   Total assets turnover	x	3.78x
   Equity multiplier	x	x

3. Do the balance sheet accounts or the income statement figuresseem to be primarily responsible for the low profits?
   -Select-IIIIIIIVVItem 17
   1. The low ROE for the firm is due to the fact that the firm isutilizing more debt than the average firm in the industry and thelow ROA is mainly a result of an excess investment in assets.
   2. The low ROE for the firm is due to the fact that the firm isutilizing less debt than the average firm in the industry and thelow ROA is mainly a result of an lower than average investment inassets.
   3. Analysis of the extended Du Pont equation and the set of ratiosshows that the turnover ratio of sales to assets is quite low;however, its profit margin compares favorably with the industryaverage. Either sales should be higher given the present level ofassets, or the firm is carrying more assets than it needs tosupport its sales.
   4. Analysis of the extended Du Pont equation and the set of ratiosshows that the turnover ratio of sales to assets is quite low;however, its profit margin compares favorably with the industryaverage. Either sales should be lower given the present level ofassets, or the firm is carrying less assets than it needs tosupport its sales.
   5. Analysis of the extended Du Pont equation and the set of ratiosshows that most of the Asset Management ratios are below theaverages. Either assets should be higher given the present level ofsales, or the firm is carrying less assets than it needs to supportits sales.
      
4. Which specific accounts seem to be most out of line relative toother firms in the industry?
   -Select-IIIIIIIVVItem 18
   1. The accounts which seem to be most out of line include thefollowing ratios: Debt to Total Capital, Inventory Turnover, TotalAsset Turnover, Return on Assets, and Profit Margin.
   2. The accounts which seem to be most out of line include thefollowing 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 thefollowing ratios: Inventory Turnover, Days Sales Outstanding, FixedAsset Turnover, Profit Margin, and Return on Equity.
   4. The accounts which seem to be most out of line include thefollowing ratios: Inventory Turnover, Days Sales Outstanding, TotalAsset Turnover, Return on Assets, and Return on Equity.
   5. The accounts which seem to be most out of line include thefollowing 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 itgrew rapidly during the year, how might that affect the validity ofyour ratio analysis?
   -Select-IIIIIIIVVItem 19
   1. It is more important to adjust the debt ratio than theinventory turnover ratio to account for any seasonalfluctuations.
   2. Seasonal sales patterns would most likely affect theprofitability ratios, with little effect on asset managementratios. Rapid growth would not substantially affect youranalysis.
   3. Rapid growth would most likely affect the coverage ratios, withlittle effect on asset management ratios. Seasonal sales patternswould not substantially affect your analysis.
   4. Seasonal sales patterns would most likely affect the liquidityratios, with little effect on asset management ratios. Rapid growthwould not substantially affect your analysis.
   5. If the firm had seasonal sales patterns, or if it grew rapidlyduring the year, many ratios would most likely bedistorted.
      
   
   How might you correct for such potential problems?
   -Select-IIIIIIIVVItem 20
   1. It is possible to correct for such problems by comparing thecalculated ratios to the ratios of firms in the same industry groupover an extended period.
   2. There is no need to correct for these potential problems sinceyou are comparing the calculated ratios to the ratios of firms inthe same industry group.
   3. It is possible to correct for such problems by insuring thatall firms in the same industry group are using the same accountingtechniques.
   4. It is possible to correct for such problems by using averagerather than end-of-period financial statement information.
   5. It is possible to correct for such problems by comparing thecalculated ratios to the ratios of firms in a different line ofbusiness.