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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)

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