10. An analysis of company performance using DuPont analysis 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, but I don't want to start something new and then be interrupted by the meeting, so how can I help? CHLOE: I've 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. Eric, my new team leader, suggested that I start by using a DuPont analysis, and I'd like 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 Cash $1,000,000 Accounts receivable Inventory 2,000,000 3,000,000 Current assets $6,000,000 Accounts payable Accruals Notes payable Current liabilities Long-term debt Total liabilities Common stock Net fixed assets 8,000,000 Retained earnings Total equity $1,200,000 400,000 1,600,000 $3,200,000 4,500,000 $7,700,000 1,575,000 4,725,000 Sales Cost of goods sold Gross profit Income Statement Data $20,000,000 12,000,000 $8,000,000 Operating expenses 5,000,000 EBIT $3,000,000 Interest expense EBT Total assets $14,000,000 Total debt and equity $6,300,000 $14,000,000 Taxes Net income 732,000 $2,268,000 793,800 $1,474,200 If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the turnover ratio, and the the total asset And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company's 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. In the dropdown lists next to your values I'm going to select correct if your calculation is correct and incorrect if your calculation is incorrect. Hydra Cosmetics Inc. DuPont Analysis Ratios Value Correct/Incorrect Profitability ratios Gross profit margin (%) 40.00 Ratios Value Correct/Incorrect Asset management ratio Total asset turnover 1.43 Operating profit margin (%) 11.34 Net profit margin (%) 10.53 Financial ratios Return on equity (%) 27.38 Equity multiplier 1.82