Industry Average Ratios Current ratio Fixed assets turnover Debt-to-capital ratio 20% Total assets turnover Times interest earned 7X Profit margin EBITDA coverage Return on total assets Return on common equity Inventory turnover Days sales outstanding Calculation is based on a 365-day year. 10x 12.86% 24 days Return on invested capital 11.50% Balance Sheet as of December 31, 2018 (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 Retained earnings 78 201 Total stockholders equity Total liabilities and equity Net fixed assets $147 $315 Total assets $450 $450 Income Statement for Year Ended December 31, 2018 (Millions of Dollars) Net sales $795.0 Cost of goods sold 660.0 Gross profit $135.0 Selling expenses EBITDA 73.5 $ 61.5 Depreciation expense 12.0 Earnings before interest and taxes (EBIT) 49.5 Interest expense 4.5 Earnings before taxes (EBT) $ 45.0 Taxes (40%) 18.0 Net income $ 27.0
Industry Average Ratios Current ratio Fixed assets turnover Debt-to-capital ratio 20% Total assets turnover Times interest earned 7X Profit margin EBITDA coverage Return on total assets Return on common equity Inventory turnover Days sales outstanding Calculation is based on a 365-day year. 10x 12.86% 24 days Return on invested capital 11.50% Balance Sheet as of December 31, 2018 (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 Retained earnings 78 201 Total stockholders equity Total liabilities and equity Net fixed assets $147 $315 Total assets $450 $450 Income Statement for Year Ended December 31, 2018 (Millions of Dollars) Net sales $795.0 Cost of goods sold 660.0 Gross profit $135.0 Selling expenses EBITDA 73.5 $ 61.5 Depreciation expense 12.0 Earnings before interest and taxes (EBIT) 49.5 Interest expense 4.5 Earnings before taxes (EBT) $ 45.0 Taxes (40%) 18.0 Net income $ 27.0
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
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 $2 million sinking fund payment on its debt. The most recent industry
average ratios and the firm’s financial statements are as follows:
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?
Transcribed Image Text:Industry Average Ratios
Current ratio
Fixed assets turnover
Debt-to-capital ratio
20%
Total assets turnover
Times interest earned
7X
Profit margin
EBITDA coverage
Return on total assets
Return on common equity
Inventory turnover
Days sales outstanding
Calculation is based on a 365-day year.
10x
12.86%
24 days
Return on invested capital
11.50%
Balance Sheet as of December 31, 2018 (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
Retained earnings
78
201
Total stockholders equity
Total liabilities and equity
Net fixed assets
$147
$315
Total assets
$450
$450
Income Statement for Year Ended December 31, 2018 (Millions of Dollars)
Net sales
$795.0
Cost of goods sold
660.0
Gross profit
$135.0
Selling expenses
EBITDA
73.5
$ 61.5
Depreciation expense
12.0
Earnings before interest and taxes (EBIT)
49.5
Interest expense
4.5
Earnings before taxes (EBT)
$ 45.0
Taxes (40%)
18.0
Net income
$ 27.0
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