Blank 1 options: Net Profit Margin, Operating Profit Margin
Blank 2 options: Equity Multiplier, Debt ratio
Blank 3 options: Use of debt versus equity financing, shareholder and dividend management
Blank 4 options: Management of its revenues and depreciation methods, control over its expenses
6. 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 Balance Sheet Data Income Statement Data $24,000,000 12,000,000 12,000,000 6,000,000 6,000,000 633,600 5,366,400 1,878,240 $3,488,160 Cash Accounts receivable Inventory $1,200,000 Accounts payable $1,440,000 Sales 2,400,000 Accruals 3,600,000 Notes payable 7,200,000 480,000 Cost of goods sold 1,920,000 Gross profit 3,840,000 Operating expenses 3,360,000 EBIT 7,200,000 Interest expense 1,200,000 EBT 3,600,000 Taxes 4,800,000 Net income Current assets Current liabilities Long-term debt Total liabilities Common stock Net fixed assets 4,800,000 Retained earnings Total equity Total assets $12,000,000 Total debt and equity $12,000,000 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. Hydra Cosmetics Inc. DuPont Analysis Check if Correct Check itf Correct Value Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Value Ratios Asset management ratio 50.00 22.36 29.07 97.09 Total asset turnover 2.00 Financing ratios Equity multiplier 1.67 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: Hydra Cosmetics 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 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 Hydra'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.) Use more equity financing in its capital structure, which will increase the equity multiplier. Increase the interest rate on its notes payable or long-term debt obligations because it will reduce the company's net profit margin. Decrease the company's use of debt capital because it will decrease the equity multiplier Decrease the amount of debt financing used by the company, which will decrease the total asset turnover ratio. 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 favor
