9. An analysis of company performance using DuPont analysis A sheaf of papers in his hand, your friend and colleague, Landon, steps into your office and asked the following. LANDON: Do you have 10 or 15 minutes that you can spare? YoU: Sure, Ive 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 1 help? LANDON: I've been reviewing the company's financial statements and looking for ways to improve our performance, in general, and the company's return on equity, or ROE, in particular, Amelia, 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 whether I've missed anything. Here are the baiance sheet and income statement data that Amelia gave me, and here are my notes with my caiculations. Couid you stert 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. If I remember correctly, the DuFont 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 . effectivaness 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. I'm going to check the box to the side of your calcilated value if vour colculation is correct and leave it unchecked if vour calculation is incorrect. Hydra Cosmetics Inc, DuPont Analysis LANDON: 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. YOU: I've just made rough calculations, so let me complete this table by inputting the components of each ratio and its value: Hydra Cosmetics Inc. DuPont Analysis LANDON: I see what 1 did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Amelia would have been very disappointed in me if t had showed her my originat 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? heck ail that apply. 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. Decrease the amount of debt financing used by the company, which will decrease the total assets tumover ratio. Increase the etficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company's total assets turnover. increase the cost and amount of assets necessary to generate each dollar of sales because it will increase the company's total assets turnover. LANDON: 1 think I understand now. Thanks for taking the time to go over this with me, and let me know when I can return the faver