Question
9. An analysis of company performance using DuPont analysis A sheaf of papers in her hand, your friend and colleague, Madison, steps into your office
9. An analysis of company performance using DuPont analysis
A sheaf of papers in her hand, your friend and colleague, Madison, steps into your office and asked the following.
MADISON: Do you have 10 or 15 minutes that you can spare?
YOU: Sure, Ive got a meeting in an hour, but I dont want to start something new and then be interrupted by the meeting, so how can I help?
MADISON: Ive been reviewing the companys financial statements and looking for ways to improve our performance, in general, and the companys return on equity, or ROE, in particular. Xavier, my new team leader, suggested that I start by using a DuPont analysis, and Id like to run my numbers and conclusions by you to see whether Ive missed anything.
Here are the balance sheet and income statement data that Xavier 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 | $1,300,000 | Accounts payable | $1,560,000 | Sales | $26,000,000 |
Accounts receivable | 2,600,000 | Accruals | 520,000 | Cost of goods sold | 13,000,000 |
Inventory | 3,900,000 | Notes payable | 2,080,000 | Gross profit | 13,000,000 |
Current assets | 7,800,000 | Current liabilities | 4,160,000 | Operating expenses | 6,500,000 |
Long-term debt | 6,760,000 | EBIT | 6,500,000 | ||
Total liabilities | 10,920,000 | Interest expense | 1,060,800 | ||
Common stock | 1,170,000 | EBT | 5,439,200 | ||
Net fixed assets | 7,800,000 | Retained earnings | 3,510,000 | Taxes | 1,903,720 |
Total equity | 4,680,000 | Net income | $3,535,480 | ||
Total assets | $15,600,000 | Total debt and equity | $15,600,000 |
If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the____________the total asset 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 companys _________ effectiveness in using the companys assets, and _______________.
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