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, Jason, stepped into your office and asked the following JASON: 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? 1 JASON: 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 equilty, or ROE, in particular. Anja, 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 Anja 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 Cash $800,000 Accounts payable $960,000 Sales $16,000,000 Accounts receivable 1,600,000 Accruals 320,000 Cost of goods sold 9,600,000 Inventory 2,400,000 Notes payable 1,280,000 Gross profit $6,400,000 Current assets $4,800,000 Current liabilities $2,560,000 Operating expenses 4,000,000 Long-term debt 2,720,000 EBIT $2,400,000 Total liabilities $5,280,000 Interest expense 480,000 Common stock 1,080,000 EBT $1,920,000 Net fixed assets 4,800,000 Retained earnings 3,240,000 Taxes 672,000 Total equity $4,320,000 Net income $1,248,000 Total assets $9,600,000 Total debt and equity $9,600,000 If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the the total asset tumover ratio, and the net profit margin And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratif gross profit margin 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 the total asset If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the turnover ratio, and the And, according to my u equity ratio DuPont equation and its calculation of ROE, the three ratios provide insights into the company's effectiveness in using the company's assets, and equity multiplier 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 management of its sales and share price use of debt versus equity financing nd then we can talk about possible strategies that will improve the ratios. In the dropdown lists next to your calculation is correct and incorrect if your calculation is incorrect OVOCATS CICLE 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 management of its liquidity and its tax records In we can talk about possible strategies that will improve the ratios. In the dropdown lists next control over its expenses ulation is correct and incorrect if your calculation is incorrect. 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. Value Correct/Incorrect Cepeus Manufacturing Inc. DuPont Analysis Value Correct/Incorrect Ratios Asset management ratio 40.00 Total asset turnover 12.00 Incorrect 13.00 Financial ratios 39.43 Correct Equity multiplier Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 1.67 1.82 JASON: OK, it looks like I've got a couple or incorrect values, so show me your calculations, and then we can talk strategies for Improvement. YOU: I've just made rough calculations, so let me complete this table by inputting the components of each ratio and its value: Note: Do not round Intermediate calculations. Round final answers to the nearest whole number. Cepeus Manufacturing Inc. DuPont Analysis Calculation Numerator Denominator Value Profitability ratlos Gross pront margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total asset turnover Financing ratios Equity multiplier JASON: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassmenti Anja would have been very disappointed in me if I had showed her my original work. So, now let's switch topics and Identity general strategies that could be used to positively affect. Cepeus's ROE. YOU: OK, so given your knowledge of the component retlos used in the DuPont equation, which of the following strategies should improve the company's ROE? Check all that apply Increase the interest rate on its notes payable or long-term debt obligations because it will reduce the company's net profit margin. Decrease the company's use of debt capitol because it will decrease the equity multiplier Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin Reduce the company's operating expenses, its cost of goods sold, and/or the interest rate on its borrowed funds because this will increase the company's net profit margin JASON: I think I understand now. Thanks for taking the time to go over this with me, and let me know when I can return the favor