the extended Du Pont equation

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)


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)