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Construct an extended du pont equation and compare the

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Reference no: EM13478965

A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the extended Du Pont 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 3.95x
Fixed assets turnover 4.69x
Debt/total assets 32.40%
Total assets turnover 2.29x
Times interest earned 18.09x
Profit margin on sales 4.31%
EBITDA coverage 15.15x
Return on total assets 9.88%
Inventory turnover 10.96x
Return on common equity 14.61%
Days sales outstandinga 35days


aCalculation is based on a 365-day year.

Balance Sheet as of December 31, 2012 (Millions of Dollars)

Cash and equivalents $97
Accounts payable $68
Net receivables 68
Notes payable 51
Inventories 182
Other current liabilities 11
Total current assets $347
Total current liabilities $130



Long-term debt 29



Total liabilities $159
Gross fixed assets 302
Common stock 154
Less depreciation 79
Retained earnings 257
Net fixed assets $223
Total stockholders' equity $411
Total assets $570
Total liabilities and equity $570
Income Statement for Year Ended December 31, 2012 (Millions of Dollars)

Net sales $950.0
Cost of goods sold 731.5
Gross profit $218.5
Selling expenses 104.5
EBITDA $114.0
Depreciation expense 16.2
Earnings before interest and taxes (EBIT) $97.8
Interest expense 4.0
Earnings before taxes (EBT) $93.8
Taxes (40%) 37.5
Net income $56.3
  1. Calculate those ratios that you think would be useful in this analysis. Do not round intermediate steps. Round your answers to two decimal places.

    		Firm Industry Average
    Current ratio x 3.95x
    Debt to total assets % 32.40%
    Times interest earned x 18.09x
    EBITDA coverage x 15.15x
    Inventory turnover x 10.96x
    DSO days 35days
    F.A. turnover x 4.69x
    T.A. turnover x 2.29x
    Profit margin % 4.31%
    Return on total assets % 9.88%
    Return on common equity % 14.61%
  2. Construct an extended Du Pont equation, and compare the company's ratios to the industry average ratios. Do not round intermediate steps. Round your answers to two decimal places.

    		Firm Industry
    Profit margin % 4.31%
    Total assets turnover x 2.29x
    Equity multiplier

Reference no: EM13478965

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