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 4.08x Fixed assets turnover 7.36x Debt-to-capital ratio 20.46% Total assets turnover 3.03x Times interest earned 17.84x Profit margin 10.29% EBITDA coverage 20.15x Return on total assets 30.12% Inventory turnover 8.82x Return on common equity 43.89% Days sales outstandinga 30.96 days Return on invested capital 40% aCalculation is based on a 365-day year. Balance Sheet as of December 31, 2016 (Millions of Dollars) Cash and equivalents $78 Accounts payable $35 Accounts receivables 66 Other current liabilities 12 Inventories 140 Notes payable 47    Total current assets $284    Total current liabilities $94 Long-term debt 23    Total liabilities $117 Gross fixed assets 191 Common stock 90     Less depreciation 85 Retained earnings 183 Net fixed assets $106    Total stockholders' equity $273 Total assets $390 Total liabilities and equity $390 Income Statement for Year Ended December 31, 2016 (Millions of Dollars) Net sales $650.0 Cost of goods sold 429.0   Gross profit $221.0 Selling expenses 71.5 EBITDA $149.5 Depreciation expense 15.0   Earnings before interest and taxes (EBIT) $134.5 Interest expense 4.9   Earnings before taxes (EBT) $129.6 Taxes (40%) 51.8 Net income $77.8 Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places. Firm Industry Average Current ratio x 4.08x Debt to total capital % 20.46% Times interest earned x 17.84x EBITDA coverage x 20.15x Inventory turnover x 8.82x Days sales outstanding days 30.96days Fixed assets turnover x 7.36x Total assets turnover x 3.03x Profit margin % 10.29% Return on total assets % 30.12% Return on common equity % 43.89% Return on invested capital % 40.00% 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 % 10.29% Total assets turnover x 3.03x Equity multiplier x x Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?

Answer 1

a)
Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places.
	Firm		Industry Average
Current ratio = Current Assets/ Current Liabilities = $284/$94	3.02	X	4.08x
Debt to total capital = Total liabilities/ Total liabilities & shareholders equity = $117/$390	30.00%		20.46%
Times interest earned = EBIT/ Interest = $134.5/$4.9	27.45	X	17.84x
EBITDA coverage = EBITDA + Lease Payments/(Interest + Lease Pay. + Principal Pay,) = $149.5/$4.0 + $2	21.67	X	20.15x
Inventory turnover = Sales/ Inventories = $650/$140	4.64	X	8.82x
Days sales outstanding = Account Receivables / (Sales /365) = 66/(650/365)	37.06	Days	30.96days
Fixed assets turnover = Sales/Total Fixed Assets = $650/$106	6.13	X	7.36x
Total assets turnover = Sales/ Total Assets = $650/$390	1.67	X	3.03x
Profit margin = Net Profit/ Sales = $77.8/$650	11.97%		10.29%
Return on total assets = Net Profit/Total Assets = $77.8 / $390	19.95%		30.12%
Return on common equity = Net profit/ Total shareholder's equity = $77.8/$273	28.50%		43.89%
Return on invested capital = EBIT x (1 – tax rate)/ Long term Debt + Total shareholder equity = ($134.5 x (1 - 40%))/($23+$273)	27.26%		40.00%
b)
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	11.97%		10.29%
Total assets turnover	1.67	X	3.03x
Equity multiplier = ROE/ROA	1.43	X	1.41
ROE = Profit Margin x Total Asset Turnover x Equity Multiplier	28.50%		43.89%
c)
Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?
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.