Analysis of Financial Statements: Tying the Ratios Together The DuPont equation

Question

Analysis of Financial Statements: Tying the Ratios Together

The DuPont equation shows the relationships among asset management, debt management, and -Select-liquiditymarketprofitabilityCorrect 1 of Item 1  ratios. Management can use the DuPont equation to analyze ways of improving the firm's performance. Its equation is:

Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. -Select-QuantitativeQualitativeForeignCorrect 2 of Item 1  factors also need to be considered.

Hide Feedback

Correct

Quantitative Problem: Rosnan Industries' 2018 and 2017 balance sheets and income statements are shown below.

What is the firm’s 2018 current ratio?

If the industry average debt-to-total-assets ratio is 30%, then Rosnan’s creditors have a -Select-smallerbiggerCorrect 1 of Item 3  cushion than indicated by the industry average.

What is the firm’s 2018 net profit margin?
%

If the industry average profit margin is 12%, then Rosnan’s lower than average debt-to-total-assets ratio might be one reason for its high profit margin.
-Select-TrueFalseCorrect 1 of Item 4

What is the firm’s 2018 price/earnings ratio? Round your answer to two decimal places.

Using the DuPont equation, what is the firm’s 2018 ROE? Round your answer to two decimal places.

Balance Sheets: 2018 2017 Cash and equivalents $60   $45   Accounts receivable 275   300   Inventories 375   350         Total current assets $710   $695   Net plant and equipment 2,000   1,490   Total assets $2,710   $2,185   Accounts payable $150   $85   Accruals 75   50   Notes payable 110   135         Total current liabilities $335   $270   Long-term debt 450   290   Common stock 1,225   1,225   Retained earnings 700   400   Total liabilities and equity $2,710   $2,185  

Explanation / Answer

CURRENT RATIO = Current Assets / Current Liabilities = 710 / 335 = 2.12

NET PROFIT MARGIN = Net Profit / Total Revenue = 353 / 2,000 = 17.65%

P/E RATIO =Market Price per share / Earning per share = 25/3.53 = 7.08

Earning per share = Net Income / Outstanding Shares = 353 / 100 = 3.53

ROE = net profit margin × asset turnover × equity multiplier

ROE = (net profit ÷ sales) × (sales ÷ assets) × (assets ÷ equity)

= 353/ 2,000 × 2,000 / 2710 × 2710 / 1925

= 0.1765 × 0.738 × 1.40 = 18.3

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.