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 most recent industry average ratios and the firm’s financial statements are as follows:
Balance Sheet as of December 31, 2008 (In Millions)
Assets:
Cash $ 78
Accounts receivable 66
Inventories 159
Total current assets $303
Gross fixed assets 225
Less depreciation 78
Net fixed assets 147
Total assets $450
Liabilities and equity:
Accounts payable $ 45
Notes payable 45
Other current liabilities 21
Total current liabilities $ 111
Long-term bonds 24
Common equity 315
Total liabilities and equity $450
Income Statement for year Ended December 31, 2008 (In Millions)
Sales $795
Cost of goods sold (excluding depreciation and amortization) 733.5
EBITDA $61.5
Depreciation and amortization 12
Earnings before interest and taxes $49.5
Interest 4.5
Earnings before taxes $ 45
Taxes (40%) 18
Net income available to common stockholders $ 27
a. Calculate the indicated ratios for this firm. (2 points)
Ratio Firm Industry Average
Total assets turnover 3.0x
Net profit margin 3%
ROE 12.9%
Total debt / total assets 30%
b. Construct the extended Du Pont equation for this firm and the industry. (1 points)
c. Identify the ratio that seems to be primarily responsible for the low profits and suggest possible ways to improve. (1 points)
