10. An analysis of company performsance using DuPont analysis Aa Aa Walking down
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10. An analysis of company performsance using DuPont analysis Aa Aa Walking down the hall of your office building with a sheaf of papers in her hand, your friend and colleague, Chloe, stepped into your office and asked the following Chloe Do you have 10 or 15 minutes that you can spare You Sure, I've got a meeting in an hour, buit I dont wont to start something new and then be interrupted by the meeting, s how can I help? Chloe Ive been reviewing the company's financial statements and looking for general ways to improve our performance, in general, and the company's return on equity, or ROE, in particular, Enic, my new team leader, suggested that I start by using a DuPont analysis, and I'd lke to run my numbers and conclusions by you, to see if I've missed anything. Here are the balance sheet and income statement data that Eric gave me, and here are my notes with my calculations Could you start by making sure that my numbers are correct? You Give me a minute to look at these financial statements and to remember what I know about the DuPont analysis. Balance Sheet Data Income Statement Data Cash Accounts receivable Inventory 900,000 Accounts payable 1,800,000 Accruals 2,700,000 Notes payable 5,400,000 Curent liablities $18,000,000 ,000,000 9,000,000 $1,080,000 Sales 60,000 Cost of goods sold Gross profit Current assets 2,880,000 Operating expenses 4,500,000 2,520,000 EBIT 5,400,000 Interest expense 4,500,000 475,200 4,024,800 1,408,680 2,616,120 Long-terrm debt Total iabilities Common stock 00,000 EBT 2,700,000 Taxes 3,600,000 Net income Net fixed assets ,600,000 Retained earnings Total equity Total assets 9,000,000 Total debt and equity 9,000,000 If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the the total asset turnover ratio, and the And, according to my understanding of the DuPont equation and its caloulation of ROE, the three ratios provide insights into the companys effectiveness in using the company's assets, and Now, let's see your notes with your ratios, and then we can talk about possible strategies that will improve the ratios. I'm going to check the box to the side of your calculated value if your calculation is correct and leave it unchecked if your calculation is incorrect. Canis Major Veterinary Supplies Inc DuPont Analysis Check if Correct Check i Correct Ratios Profitability ratios Gross profit margin (%) Operating profit margin(%) Net profit margin (%) Return on equity (%) 50.00 22.36 29.07 97.09 Total asset turnover 2.00 Financing ratios Equity multiplier -67 Chloe OK, it looks like I've got a couple of incorrect values, so show me your calculations, and then we can talk rateges for You I've just made rough calculations, so let me complete this table by inputting the components of each ratio and its value Canis Major Veterinary Supplies Inc DuPont Analysis Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin(%) Return on equity (%) Asset management ratio Total asset turnover Financing ratios Equity multiplier Chloe I see what I did wrong in my computations. Thanks for reviesing these calculations with me. You saved me from a lot of embarressment! Eric would have been very disappointed in me if Ihed showed him my original work So, now let's swiltch topics and identily general strategies that could be used to positively affect Canis Major's ROE You Ok, so given your knowledge of the component ratios used in the DuPont equation, which of the following strategies should improve the company's ROE? (Check all that apply.) Increase the cost end amount of assets necessary to generate each dollar of sales because it wil increase the company's total asset turnover. Decrease the amount of debt financing used by the company, which will decrease the total asset turnover ratio Decrease the company's use of debt capital because it will decrease the equity multiplier use more equity financing in its capital structure, which will increase the equity multiplier Chloe I think I understand now. Thanks for taking the time to go over this with me, and let me know when 1 can return the favorExplanation / Answer
If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the net profit margin ratio, the total asset turnover ratio, and the equity multiplier.
And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insight into the company's profitability, effectiveness in using the company's assets, and use of debt versus equity financing.
Ratios Value Check if Correct Ratios Value Check if Correct Profitability ratios Asset management ratio Gross profit margin (%) 50.00 Total asset turnover 2.00 Operating profit margin (%) 22.36 Net profit margin (%) 29.07 Financing ratios Return on equity (%) 97.09 Equity multiplier 1.67Related Questions
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