00000000000000000000000000000000000000000000000000000000000000000000000000000000
ID: 2662570 • Letter: 0
Question
000000000000000000000000000000000000000000000000000000000000000000000000000000000000 0000000000000000000000000000000000000000000000000000000000000000000000000000000000 00000000000000000000000000000000000000000000000000000000000000000000000000000000000 0000000000000000000000000000000000000000000000000000000000000000000000000000000000000 00000000000000000000000000000000000000000000000000000000000000000000000000000000 000000000000000000000000000000000000000000000000000000000000000000000000000000000000 000000000000000000000000000000000000000000000000000000000000000000000000000000000 00000000000000000000000000000000000000000000000000000000000000000000000000000000000 00000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 000000000000000000000000000000000000000000000000000000000000000000000000000000 0000000000000000000000000000000000000000000000000000000000000000000000000000000 00000000000000000000000000000000000000000000000000000000000000000000000000000 0000000000000000000000000000000000000000000000000000000000000000000000000000000 0000000000000000000000000000000000000000000000000000000000000000000000000000000 000000000000000000000000000000000000000000000000000000000000000000000000000000000000 0000000000000000000000000000000000000000000000000000000000000000000000000000000000 00000000000000000000000000000000000000000000000000000000000000000000000000000000000 0000000000000000000000000000000000000000000000000000000000000000000000000000000000000 00000000000000000000000000000000000000000000000000000000000000000000000000000000 000000000000000000000000000000000000000000000000000000000000000000000000000000000000 000000000000000000000000000000000000000000000000000000000000000000000000000000000 00000000000000000000000000000000000000000000000000000000000000000000000000000000000 00000000000000000000000000000000000000000000000000000000000000000000000000000000000000000 000000000000000000000000000000000000000000000000000000000000000000000000000000 0000000000000000000000000000000000000000000000000000000000000000000000000000000 00000000000000000000000000000000000000000000000000000000000000000000000000000 0000000000000000000000000000000000000000000000000000000000000000000000000000000 0000000000000000000000000000000000000000000000000000000000000000000000000000000Explanation / Answer
a) According to DuPont model,
ROE = Net profit margin X Asset turnover ratio X EquityMultiplier
ROE = (Net income/ sales) X (Sales/ assets) X (Assets/ Totalequity)
Calculating ROE using this model, we get
ROE = 3.5% X 1.5 X 2.5
ROE = 0.035 X 1.5 X 2.5
ROE = 13.12%
b) Interpreting the ratios:
Ø Return on assets (ROA): It is a measure ofprofit per dollar of assets. Since ROA is less, this indicates thatthe industry is ineffective in utilizing its assets.
Ø Current ratio: Current ratio is a measureof short-term liquidity of a firm. Current ratio of 2.0 indicatesthat the industry is effective in meeting its short-termobligations.
Ø Days cash on hand: It is a measure of bothshort-term and long-term liquidity. The less no. of days indiatesthat the industry is ineffective in holding cash for more no. ofdays.
Ø Average collection period:It is a measureof company’s ability in its credit granting and cashcollection activities. The less no. of days indicates theeffectiveness of the industry in collecting the receivables.
Ø Debt-ratio: If it is more than 1.0 itindicates that the company is using neagtive net worth, andtechnically bankrupt. In this case, it is less than 1.0 which showsthat the industry has more assets than debt.
Ø Debt-equity ratio: The debt-equity ratio of2.5 indicates that the industry is using more amount of debt in itscapital structure, which is a risk to the overall industry.
Ø Times-interest Earned ratio: The ratio of2.6 indicates that the industry is generating $2.6 in income forevery 1$ of interest expense, which shows an insecure position forthe industry.
Ø Fixed-asset turnover ratio: The ratio of1.4 indicat#;s that the industry is able to turn $1.4 of revenuefrom sales for each dollar that is invested in fixed assets whichindicates that the industry is ineffective in using its fixedassets.
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