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9. An analysis of company performance using DuPont analysis A sheaf of papers in his hand, your friend and colleague, Jason, steps into your office and asked the following. JASON: 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? JASON: 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. Anja, 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 Anja 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 Cash Accounts payable Accruals Accounts receivable $800,000 1,600,000 2,400,000 4,800,000 Inventory Notes payable Current liabilities Current assets Income Statement Data Sales $16,000,000 Cost of goods sold 9,600,000 Gross profit 6,400,000 Operating expenses 4,000,000 EBIT 2,400,000 Interest expense 480,000 EBT 1,920,000 Taxes 480,000 Net income $1,440,000 $960,000 320,000 1,280,000 2,560,000 2,720,000 5,280,000 1,080,000 3,240,000 4,320,000 $9,600,000 Long-term debt Total liabilities Net fixed assets 4,800,000 Common stock Retained earnings Total equity Total debt and equity Total assets $9,600,000 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 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 Gross profit margin (%) Total assets turnover 40.00 1.67 Operating profit margin (%) 12.00 Net profit margin (%) Financial ratios 15.00 Return on equity (%) Equity multiplier 45.59 1.82 JASON: 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. Cepeus Manufacturing Inc. DuPont Analysis Cepeus Manufacturing Inc. DuPont Analysis Calculation Value Ratios 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 JASON: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Anja 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. 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 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 company's use of debt capital because it will decrease the equity multiplier. , the total asset If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the turnover ratio, and the operating profit margin net profit margin company's And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratio , 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 , the total asset If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the turnover ratio, and the debt ratio And, according to my u DuPont equation and its calculation of ROE, the three ratios provide insights into the company's , effectiveness in using the company's assets, and equity multiplier 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. , 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 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 the su ve Your Calcura cu varder your calculation is correct and leave it unchecked if your calculation is incorrect. Conou Moufatumia Dont A ir , 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 V , effectiveness in using the company's assets, and management of its revenues and depreciation methods talk about possible strategies that will improve the ratios. I'm going to check the box to ct and leave it unchecked if your calculation is incorrect. control over its expenses Cepeus Manufacturing Inc. DuPont Analysis Ch 04: Assignment - Analysis of Financial Statements Value Correct/Incorrect Value Correct/Incorrect Ratios Asset management ratio Total assets turnover 1.67 Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 40.00 12.00 15.00 Correct Financial ratios Equity multiplier 45.59 Incorrect 1.82