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 $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

Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places.

	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%
Return on invested capital	%	30.63%

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	%	8.80%
Total assets turnover	x	3.02x
Equity multiplier	x	x

Answer 1