3 DuPont Analysis Playing the Numbers Game Numbers! I need to see numbers!\" exc
ID: 2819156 • Letter: 3
Question
3 DuPont Analysis Playing the Numbers Game Numbers! I need to see numbers!" exclaimed Marcus in response to com- ments made by the assistant vice-president of Finance, Jeff Smith. Marcus Lenovo, president and chief executive officer of Duralex Inc., had been instrumental in significantly increasing the company's size during his first five years in office. He spearheaded some successful marketing campaigns and revamped the production facilities by adopting the latest technology in injection molding. He also implemented various cost-cutting measures and introduced performance plans to boost efficiency. Foremen and supervisors were offered stock option incentives, and bonuses were tied to earnings per share (EPS) growth Duralex Inc., a medium-sized plastic molding company, was founded in 2008 and was located in Midland, Michigan. The company supplied molded plastic products to various processing industries as well as end-users. It enjoyed a fairly diversified base of customers, ranging from automobile and home products manufacturers to the federal government. After an initial period of sluggish growth, the firm's revenues and profits had almost quadrupled. Most of the increase had been achieved under Lenovo's lead- ership. The plastics business offered potential for high profit margins, and as a result it attracted many competitors. Despite the fierce competition, Duralex's stock, which traded in the over-the-counter market, had tripled in value over the past five years, making the shareholders very happyExplanation / Answer
For better understanding lets consider Duralex as company 1 (C1) and Apex as company 2 (C2)
Analysts make an estimate about the company depending upon its financial health. In the present case analysts are correct by putting C1 on hold and making C2 a strong buy because of various factors that are to be considered like
1) C1 has heavy reliance on debt when compared to equity. This increases the expenses of the company in the form of interest and might also generate cash flow problems. Also creditors get major stake in the company than the stockholders which is a risky situation.
C2 on the other hand has a balanced mix of debt and equity making its financial position stronger.
2) C1 has a negative equity in the year 2015 which means it does not have enough assets to cover all its liabilities for the period which again is a risky situation if existed for long , as the company might become insolvent in future.
3) Sales generated by C1 are not enough to cover its costs because of which it has negative income in the year 2015. Also C1 is having continous decrease in income from 2012 which does not making it an attracting option for investors. Because of this investors reduce, stock prices decline and the company might become bankrupt.
On the other hand C2 shows a continous improvement in its operations by showing a significant increase in income from 2012. Though sales of C2 are less when compared to C1 but it is able to increase its income every year.
All of the above favourable points about C2 urges the analysts to consider it as 'Strong Buy' . Therefore analysts recommendations prove to be accurate in every sense.
Hope this was helpful :)
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