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, 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? 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 balance sheet and income statement data that Amelia 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 $1,440,000 480,000 Cash $1,200,000 Accounts receivable 2,400,000 Inventory 3,600,000 Current assets 7,200,000 Sales Cost of goods sold Gross profit Operating expenses EBIT $24,000,000 14,400,000 9,600,000 6,000,000 1,920,000 3,840,000 5,520,000 Accounts payable Accruals Notes payable Current liabilities Long-term debt Total liabilities Common stock Retained earnings Total equity Total debt and equity Interest expense 9.360,000 1,260,000 3,600,000 892,800 2.707,200 EBT Net fixed assets 7,200,000 3,780,000 Taxes 947,520 5,040,000 Net income $1,759,680 Total assets $14,400,000 $14,400,000 the total asset If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the turnover ratio, and the net profit margin And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratioperating profit margin company's effectiveness in using the company's assets, and 5 actory 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. Cepeus Manufacturing Inc. DuPont Analysis 11 I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the turnover ratio, and the the total asset Is equity multiplier And, according to my u debt 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 ductory 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. turnover ratio, and the 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 use of debt versus equity financing shareholder and dividend management and then we can talk about possible strategies that will improve the ratios. I'm going to check the box to these or your careutatea value your riculation is correct and leave it unchecked if your calculation is incorrect. Cepeus Manufacturing Inc. DuPont Analysis Luluvuu, June 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 control over its expenses talk about possible strategies that will improve the ratios. I'm going to check the box to management of its revenues and depreciation methods at and leave it unchecked if your calculation is incorrect. Cepeus Manufacturing Inc. DuPont Analysis Correct/Incorrect Ratios Value Correct/Incorrect Ratios Value Profitability ratios Gross profit margin (%) 40.00 Operating profit margin (9) 11.28 Asset management ratio Total assets turnover 1.67 ch 0 op 4 96 3 4 5 6 & 7 00 9 Value Correct/Incorrect Value Correct/Incorrect Ratios Asset management ratio 40.00 Total assets turnover 1.67 Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 11.28 12.22 Financial ratios Equity multiplier 31.43 1.54 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: Do not round intermediate calculations and round your final answers up to two decimals. hp Do not round intermediate calculations and round your final answers up to two decimals. Cepeus Manufacturing Inc. DuPont Analysis Calculation Value Numerator Denominator Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total assets turnover Financial ratios Equity multiplier LANDON: I see what I 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 I had showed her my original work. So, now let's switch topics and identify general strategies that could be used to positively affect Cepeus's ROE LANDON: I see what I did wrong in my computations. TRS TUR TURITY GRU is mure Tour embarrassment Amelia 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 Copeus'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. Decrease the amount of debt financing used by the company, which will decrease the total assets turnover ratio, Increase the efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company's total assets tumover. use more debt financing in its capital structure and increase 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