116 Part 2 Fundamental Concepts in Financial Management
Ratio Barry Industry Average
Current _____ 2.0#
Quick _____ 1.3#
Days sales outstandinga _____ 35 days
Inventory turnover _____ 6.7#
Total assets turnover _____ 3.0#
Net profit margin _____ 1.2%
ROA _____ 3.6%
ROE _____ 9.0%
Total debt/total assets _____ 60.0%
aCalculation is based on a 365-day year.DUPONT ANALYSIS A firm has been experiencing low profitability in recent years. Per-
form 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:Industry Average Ratios
Current ratio 2 # Fixed assets turnover 6 #
Debt/total assets 30% Total assets turnover 3 #
Times interest earned 7 # Profit margin 3%
EBITDA coverage 9 # Return on total assets 9%
Inventory turnover 10 # Return on common equity 12.86%
Days sales outstandinga 24 days
aCalculation is based on a 365-day year.Balance Sheet as of December 31, 2008 (Millions of Dollars)
Cash and equivalents $ 78 Accounts payable $ 45
Net receivables 66 Notes payable 45
Inventories 159 Other current liabilities 21
Total current assets $303 Total current liabilities $111
Long-term debt 24
Total liabilities $135
Gross fixed assets 225
Less depreciation 78 Common stock 114
Net fixed assets $147 Retained earnings 201
Total stockholders’ equity $315
Total assets $450 Total liabilities and equity $450Income Statement for Year Ended December 31, 2008 (Millions of Dollars)
Net sales $795.0
Cost of goods sold 660.0
Gross profit $135.0
Selling expenses 73.5
EBITDA $ 61.5
Depreciation expense 12.0
Earnings before interest and taxes (EBIT) $ 49.5
Interest expense 4.5
Earnings before taxes (EBT) $ 45.0
Taxes (40%) 18.0
Net income $ 27.0