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?
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?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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 | 11.25% | |
| Inventory turnover | 10x | 16.10% | |
| Days sales outstanding | 24 days | 14.40% |
aCalculate is based on 365-day year.
| 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 |
78 | 201 | |
| Net fixed assets | $147 | Total |
$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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