9. An analysis of company performance using DuPont analysis A sheaf of papers in her hand, your friend and colleague, Chloe, steps into your office and asked the following. CHLOE: 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? CHLOE: 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. Eric, 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 Eric 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 $600,000 Accounts payable Sales $720,000 240,000 $12,000,000 7,200,000 Accounts receivable 1,200,000 Cost of goods sold Accruals Notes payable Inventory 1,800,000 960,000 Gross profit 4,800,000 Balance Sheet Data Income Statement Data Cash $1,200,000 Accounts payable $1,440,000 Sales Accounts receivable Accruals 480,000 Cost of goods sold $24,000,000 12,000,000 12,000,000 6,000,000 2,400,000 3,600,000 7,200,000 Inventory Notes payable 1,920,000 Gross profit Current assets Current liabilities Operating expenses 3,840,000 6,240,000 Long-term debt EBIT Total liabilities 10,080,000 Interest expense 6,000,000 979,200 5,020,800 Common stock 1,680,000 EBT Net fixed assets 9,600,000 Retained earnings 5,040,000 Taxes 1,757,280 Total equity 6,720,000 Net income $3,263,520 Total assets $16,800,000 Total debt and equity $16,800,000 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 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 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 Ratios Value Correct/Incorrect Ratios Value Correct/Incorrect Profitability ratios Asset management ratio 50.00 Total assets turnover 1.43 20.92 Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 19.43 Financial ratios 46.40 Equity multiplier 1.67 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: Cepeus Manufacturing Inc. DuPont Analysis Ratios Calculation Value Profitability ratios Numerator Denominator Gross profit margin (%) / = Operating profit margin (%) / = Net profit margin (%) / = Return on equity (%) / Asset management ratio Total assets turnover / = Financial ratios Equity multiplier / 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 assets 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 assets turnover. Decrease the amount of debt financing used by the company, which will decrease the total assets turnover ratio. Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin