Textbook Problem

Income Statement for Year Ended December 31, 2018 (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 expenses	12.0
Earnings before interest and taxes (EBIT)	$ 49.5
Interest expenses	4.5
Earnings before taxes (EBT)	$ 45.0
Taxes (40%)	18.0
Net income	$ 27.0

1. a. Calculate the ratios you think would be useful in this analysis.
2. b. Construct a DuPont equation, and compare the company’s ratios to the industry average ratios.
3. c. Do the balance-sheet accounts or the income statement figures seem to be primarily responsible for the low profits?
4. d. Which specific accounts seem to be most out of line relative to other firms in the industry?
5. 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?