125 interest expense 24500 earnings before taxes ebt

125
Interest expense 24,500
Earnings before taxes (EBT) $ 45,500
Federal and state income taxes (40%) 18,200
Net income $ 27,300
RATIO BARRY INDUSTRY AVERAGE
Current assets/current liabilities 2.0
Days sales outstanding
a
35 days
Sales/inventories 6.7
Sales/total assets 3.0
Net income/sales 1.2%
Net income/total assets 3.6%
Net income/common equity 9.0%
Total debt/total assets 60.0%
a Calculation is based on a 365-day year.
The Ferri Furniture Company, a manufacturer and wholesaler of high-quality home fur-
nishings, has been experiencing low profitability in recent years. As a result, the board
of directors has replaced the president of the firm with a new president, Helen Adams,
who has asked you to make an analysis of the firm’s financial position using the Du Pont
chart. In addition to the information given below, you have been informed by the new
president that the firm has no lease payments but has a $2 million sinking fund payment
on its debt. The most recent industry average ratios, and Ferri’s financial statements, are
as follows:
INDUSTRY AVERAGE RATIOS
Current ratio 2 Sales/fixed assets 6
Debt/total assets 30% Sales/total assets 3
Times interest earned 7 Profit margin on sales 3%
EBITDA coverage 9 Return on total assets 9%
Sales/inventory 10 Return on common equity 12.9%
Days sales outstanding
a
24 days
a Calculation is based on a 365-day year.
Ferri Furniture Company: Balance Sheet as of December 31, 2001
(Millions of Dollars)
Cash $ 45 Accounts payable $ 45
Marketable securities 33 Notes payable 45
Net receivables 66 Other current liabilities 21
Inventories 159 Total current liabilities $111
Total current assets $303 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 $450
3-18
Du Pont analysis
PROBLEMS

CHAPTER 3
■
ANALYSIS OF FINANCIAL STATEMENTS
126
Ferri Furniture Company: Income Statement for Year Ended December 31, 2001
(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
a. Calculate those ratios that you think would be useful in this analysis.
b. Construct an extended Du Pont equation for Ferri, and compare the company’s ra-
tios 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 in relation to other firms in the
industry?
e. If Ferri 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?
The Corrigan Corporation’s forecasted 2002 financial statements follow, along with
some industry average ratios.