a. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places. Firm Industry Average Current ratio Debt to total capital Times interest earned EBITDA coverage Inventory turnover Days sales outstanding Fixed assets turnover Total assets turnover Profit margin Return on total assets Return on common equity Return on invested capital Profit margin Total assets turnover Equity multiplier 2.93 x 0.27 % 9.55 x 12.09 x 4.56 x 33.14 days 5.06 x 1.77 x 4.33 % 7.66 % 10.52 % 9.85 % b. Construct a DuPont equation, and the industry. Do not round intermediate calculations. Round your answers to two decimal places. Firm % Industry. 3.75% X 3x 2x 15% 5x 10x 9x X -Select- 25days 6x 3x 3.75% 11.25% 15.70% 14.60% X c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? I. 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. II. 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 lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales. III. Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages. Either assets should be higher given the present level of sales, or the firm is carrying less assets than it needs to support its sales. IV. The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment in assets. V. The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than average investment in assets.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 $1 million
sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows:
Current ratio
Debt-to-capital ratio
Times interest earned
EBITDA coverage
Inventory turnover
Cash and equivalents
Accounts receivables
Inventories
Total current assets
Gross fixed assets
Days sales
outstandinga
aCalculation is based on a 365-day year.
Balance Sheet as of December 31, 2021 (millions of dollars)
$78
Accounts payable
74
147
$299
Less depreciation
Industry Average Ratios
Net fixed assets.
Total assets
2x
15%
5x
10x
9x
25days
Fixed assets turnover
Total assets turnover
Profit margin
Return on total assets
Return on common
equity
Return on invested
capital
216
55
$161
$460
Other current liabilities
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained earnings
Total stockholders' equity
Total liabilities and equity
Depreciation expense
Earnings before interest and taxes (EBIT)
Interest expense
Earnings before taxes (EBT)
Taxes (25%)
Net income
6x
3x
3.75%
11.25%
15.70%
14.60%
Income Statement for Year Ended December 31, 2021 (millions of dollars)
Net sales
$
815.00
Cost of goods sold
670.00
Gross profit
$ 145.00
Selling expenses
78.50
EBITDA
66.50
14.00
52.50
5.50
47.00
11.75
35.25
$
$
$
$ 37
28
37
$102
23
$125
124
211
$335
$460
$
Transcribed Image Text: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 $1 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows: Current ratio Debt-to-capital ratio Times interest earned EBITDA coverage Inventory turnover Cash and equivalents Accounts receivables Inventories Total current assets Gross fixed assets Days sales outstandinga aCalculation is based on a 365-day year. Balance Sheet as of December 31, 2021 (millions of dollars) $78 Accounts payable 74 147 $299 Less depreciation Industry Average Ratios Net fixed assets. Total assets 2x 15% 5x 10x 9x 25days Fixed assets turnover Total assets turnover Profit margin Return on total assets Return on common equity Return on invested capital 216 55 $161 $460 Other current liabilities Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total stockholders' equity Total liabilities and equity Depreciation expense Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Taxes (25%) Net income 6x 3x 3.75% 11.25% 15.70% 14.60% Income Statement for Year Ended December 31, 2021 (millions of dollars) Net sales $ 815.00 Cost of goods sold 670.00 Gross profit $ 145.00 Selling expenses 78.50 EBITDA 66.50 14.00 52.50 5.50 47.00 11.75 35.25 $ $ $ $ 37 28 37 $102 23 $125 124 211 $335 $460 $
a. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places.
Firm
Industry Average
Current ratio
Debt to total capital
Times interest earned
EBITDA coverage
Inventory turnover
Days sales outstanding
Fixed assets turnover
Total assets turnover
Profit margin
Return on total assets
Return on common equity
Return on invested capital
Profit margin
Total assets turnover
Equity multiplier
2.93 X
0.27 %
9.55 X
12.09 x
4.56 X
33.14 days
5.06 x
1.77 X
4.33 %
7.66 %
10.52 %
9.85 %
b. Construct a DuPont equation, and the industry. Do not round intermediate calculations. Round your answers to two decimal places.
Firm
Industry.
3.75%
%
3x
X
2x
15%
5x
10x
9x
25days
6x
3x
3.75%
11.25%
15.70%
14.60%
X
-Select- ✓
X
c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?
I. 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.
II. 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 lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales.
III. Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages. Either assets should be higher given
the present level of sales, or the firm is carrying less assets than it needs to support its sales.
IV. The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment
in assets.
V. The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than average
investment in assets.
Transcribed Image Text:a. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places. Firm Industry Average Current ratio Debt to total capital Times interest earned EBITDA coverage Inventory turnover Days sales outstanding Fixed assets turnover Total assets turnover Profit margin Return on total assets Return on common equity Return on invested capital Profit margin Total assets turnover Equity multiplier 2.93 X 0.27 % 9.55 X 12.09 x 4.56 X 33.14 days 5.06 x 1.77 X 4.33 % 7.66 % 10.52 % 9.85 % b. Construct a DuPont equation, and the industry. Do not round intermediate calculations. Round your answers to two decimal places. Firm Industry. 3.75% % 3x X 2x 15% 5x 10x 9x 25days 6x 3x 3.75% 11.25% 15.70% 14.60% X -Select- ✓ X c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? I. 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. II. 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 lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales. III. Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages. Either assets should be higher given the present level of sales, or the firm is carrying less assets than it needs to support its sales. IV. The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment in assets. V. The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than average investment in assets.
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