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 those ratios that 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?

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Industry Average Ratios Current ratio Fixed assets turnover 2x Debt/total assets 30% Total assets turnover 3х Profit margin Times interest earned 3% 7X EBITDA coverage 9x Return on total assets 9% Return on common equity Inventory turnover 10x 12.86% Days sales outstanding 24 days *Calculation is based on a 365-day year. Balance Sheet as of December 31, 2008 (Millions of Dollars) $ 78 $ 45 Accounts payable Cash and equivalents Notes payable Net receivables 66 45 Inventories 159 Other current liabilities 21 Total current assets $303 Total current liabilities $11 Long-term debt 24 Total liabilities $135 225 Gross fixed assets Less depreciation 78 Common stock 114 Retained earnings Total stockholders' equity Total liabilities and equity Net fixed assets $147 201 $315 $450 Total assets $450 Income Statement for Year Ended December 31, 2008 (Millions of Dollars) Net sales $795.0 660.0 Cost of goods sold Gross profit Selling expenses $135.0 73.5 $ 61.5 12.0 $ 49.5 EBITDA Depreciation expense Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Тахes (40%) 4.5 $ 45.0 18.0 $ 27.0 Net income