9. An analysis of company performance using DuPont analysis A shear of papers in his hand, your friend and colleague, Akira, steps into your office and asked the following. AKIRA: Do you have 10 or 15 minutes that you can spare? Or15 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? war , som AKIRA: 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. 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 whether 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? YOUT Give me a minute to look at these financial statements and to remember what I know about the DuPont analysis Balance Sheet Data Cash Accounts receivable $1,300,000 2,600,000 Accounts payable Accruals $1,560,000 520,000 Income Statement Data Sales $26,000,000 Cost of goods sold 15,600,000 Balance Sheet Data Income Statement Data Sales Cash Accounts receivable Inventory Current assets $1,300,000 2,600,000 3,900,000 7,800,000 Accounts payable Accruals Notes payable Current liabilities Long-term debt 4 Total liabilities Common stock Retained earnings Total equity 7 Total debt and equity $1,560,000 520,000 2,080,000 4,160,000 ,420,000 8,580,000 1,755,000 5,265,000 ,020,000 $15,600,000 Cost of goods sold Gross profit Operating expenses Interest expense EBT Taxes Net income $26,000,000 15,600,000 10,400,000 6,500,000 3,900,000 780,000 3,120,000 1,092,000 $2,028,000 Net fixed assets 7,800,000 Total assets $15,600,000 If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the net profit margin turnover ratio, and the equity ratio the total asse And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company's use of debt versus equity financing effectiveness in using the company's assets, and control over its expenses 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. And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company's use of debt versus equity financing effectiveness in using the company's assets, and control over its expenses - 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. Canis Major Veterinary Supplies Inc. DuPont Analysis Ratios Value Correct/Incorrect Value Correct/Incorrect Ratios Asset management ratio Total assets turnover Asset management ratio Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 40.00 12.00 13.00 39.51 Financial ratios Equity multiplier 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. 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. Canis Major Veterinary Supplies Inc. DuPont Analysis Ratios Calculation Value Numerator Denominator E Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total assets turnover Financial ratios Equity multiplier ctory AKIRA: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a 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 Canis Major'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? So, now TEKS SWITCIT topics and identity generar strategies that could be used to positively arrece Canis Majors KUE. 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 firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin. Decrease the amount of debt financing used by the company, which will decrease the total assets turnover ratio. 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 company's use of debt capital because it will decrease the equity multiplier. AKIRA! 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