Question

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

1. 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%

Answer 1

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%