10. An analysis of company performance using DuPont analysis Walking down the hall of your office building with a sheaf of papers in his hand, your friend and colleague, Akira, stepped into your office and asked the following. Akira 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? Akira 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. Emma, 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 Emma 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 Accounts payable $1,100,000 $1,320,000 Sales $22,000,000 Cash Cost of goods sold 2,200,000 Accruals 440,000 11,000,000 Accounts receivable Notes payable Gross profit Inventory 3,300,000 1,760,000 11,000,000 6,600,000 3,520,000 Operating expenses 5,500,000 Current assets Current liabilities 4,400,000 5,500,000 Long-term debt BIT Total liabilities Interest expense 739,200 7,920,000 Common stock 1,320,000 T 4,760,800 Long-term debt 4,400,000 BIT 5,500,000 7,920,000 Total liabilities Interest expense 739,200 Common stock 1,320,000 T 4,760,800 Retained earnings 6,600,000 3,960,000 1,666,280 Net fixed assets Taxes Total equity 5,280,000 Net income $3,094,520 Total assets $13,200,000 Total debt and equity $13,200,000 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 calcu lation of ROE, the three ratios provide insights ,effectiveness in using the company's assets, and into the company's 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 Hydra Cosmetics Inc. DuPont Analysis Check if Check if Ratios Ratios Value Correct Value Correct Profitability ratios Asset management ratio Gross profit margin (%) 50.00 Total asset turnover 1.67 Operating profit margin (%) 21.64 Net profit margin (% 23.44 Financing ratios Return on equity (%) 65.37 Equity multiplier 1.67 Akira OK, it looks like I've got a couple of incorrect values, so show me your calculations, and then we can talk strategies for improvement. Hydra Cosmetics Inc. DuPont Analysis Calculation Ratios Value Profitability ratios Numerator Denominator Gross profit margin (%) Operating profit margin (% / Net profit margin (%) = Return on equity (% / Asset management ratio Total asset turnover Financing ratios Equity multiplier = Akira I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from lot of embarrassment! Emma would have been very disappointed in me if I had showed her my original work. So, now let's switch topics and identify general strategies that could be used to positively affect Hydra'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 and amount of assets necessary to generate each dollar of sales because it will increase the company's total asset turnover. Increase the efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company's total asset turnover Decrease the amount of debt financing used by the company, which will decrease the total asset turnover ratio. Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin. Akira I think I understand now. Thanks for taking the time to over this with me, and let me know when I can return the favor. 10. An analysis of company performance using DuPont analysis Walking down the hall of your office building with a sheaf of papers in his hand, your friend and colleague, Akira, stepped into your office and asked the following. Akira 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? Akira 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. Emma, 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 Emma 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 Accounts payable $1,100,000 $1,320,000 Sales $22,000,000 Cash Cost of goods sold 2,200,000 Accruals 440,000 11,000,000 Accounts receivable Notes payable Gross profit Inventory 3,300,000 1,760,000 11,000,000 6,600,000 3,520,000 Operating expenses 5,500,000 Current assets Current liabilities 4,400,000 5,500,000 Long-term debt BIT Total liabilities Interest expense 739,200 7,920,000 Common stock 1,320,000 T 4,760,800 Long-term debt 4,400,000 BIT 5,500,000 7,920,000 Total liabilities Interest expense 739,200 Common stock 1,320,000 T 4,760,800 Retained earnings 6,600,000 3,960,000 1,666,280 Net fixed assets Taxes Total equity 5,280,000 Net income $3,094,520 Total assets $13,200,000 Total debt and equity $13,200,000 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 calcu lation of ROE, the three ratios provide insights ,effectiveness in using the company's assets, and into the company's 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 Hydra Cosmetics Inc. DuPont Analysis Check if Check if Ratios Ratios Value Correct Value Correct Profitability ratios Asset management ratio Gross profit margin (%) 50.00 Total asset turnover 1.67 Operating profit margin (%) 21.64 Net profit margin (% 23.44 Financing ratios Return on equity (%) 65.37 Equity multiplier 1.67 Akira OK, it looks like I've got a couple of incorrect values, so show me your calculations, and then we can talk strategies for improvement. Hydra Cosmetics Inc. DuPont Analysis Calculation Ratios Value Profitability ratios Numerator Denominator Gross profit margin (%) Operating profit margin (% / Net profit margin (%) = Return on equity (% / Asset management ratio Total asset turnover Financing ratios Equity multiplier = Akira I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from lot of embarrassment! Emma would have been very disappointed in me if I had showed her my original work. So, now let's switch topics and identify general strategies that could be used to positively affect Hydra'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 and amount of assets necessary to generate each dollar of sales because it will increase the company's total asset turnover. Increase the efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company's total asset turnover Decrease the amount of debt financing used by the company, which will decrease the total asset turnover ratio. Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin. Akira I think I understand now. Thanks for taking the time to over this with me, and let me know when I can return the favor