Attention: Due to a bug in Google Chrome, this page may not function correctly. Click here to learn more. 9. An analysis of company performance using DuPont analysis Aa Aa Walking down the hall of your office building with a sheaf of papers in his hand, your friend and colleague, Jason, stepped 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 general 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 if 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. Cash Accounts receivable Inventory Current assets Balance Sheet Data $1,300,000 Accounts payable 2,600,000 Accruals 3,900,000 Notes payable 7,800,000 Current liabilities Long-term debt Total liabilities Common stock 5,200,000 Retained earnings Total equity $13,000,000 Total debt and equity $1,560,000 520,000 2,080,000 4,160,000 2,990,000 7,150,000 1,462,500 4,387,500 5,850,000 $13,000,000 Income Statement Data Sales $26,000,000 Cost of goods sold 13,000,000 Gross profit 13,000,000 Operating expenses 6,500,000 EBIT 6,500,000 Interest expense 608,400 EBT 5,891,600 Taxes 2,062,060 Net income $3,829,540 Net fixed assets Total assets If I remember correctly, the DuPont equation breaks down our return on equity (ROE) into three component ratios: the the 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. Canis Major Veterinary Supplies Inc. DuPont Analysis Check if Check if Ratios Value Correct Ratios Value Correct Profitability ratios Asset management ratio Gross profit margin (%) 50.00 Total asset turnover 2.00 Operating profit margin (%) 22.66 Net profit margin (%) 29.46 Financing ratios Return on equity (%) 107.23 Equity multiplier 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: Canis Major Veterinary Supplies 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 asset turnover Financing ratios You: I've just made rough calculations, so let me complete this table by inputting the components of each ratio and its value: Canis Major Veterinary Supplies Inc. DuPont Analysis Ratios Calculation Value Profitability ratios Numerator Denominator Gross profit margin (%) 7 Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total asset turnover Financing 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 hershowed 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 strategles should improve the company's ROE? (Check all that apply.) 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 Increase the cost and amount of assets necessary to generate each dollar of sales because it will increase the company's total asset turnover. Decrease the company's use of debt capital because it will decrease the equity multiplier. Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin. Jason 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 faune