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 _______________.