Dupont Analysis Case

Attached Files:

• 1.0 Diamond Foods Case Study.pdf 1.0 Diamond Foods Case Study.pdf - Alternative Formats (14.016 MB)
• Diamond Foods Data.xlsx (102.914 KB)

Profitability, Risk, and Cash Flow Analysis

(a) Prepare common-size statements of operations for the past five fiscal years (20072011) and common-size balance sheets on the respective end of fiscal years for Diamond. Based on your review of the common-size financial statements, describe important changes over the years (20072011) in the financials of Diamond.

(b) Apply the DuPont model (which disaggregates the performance of managers into three componentsprofitability, asset utilization, and financial leverage) to analyze financial performance of Diamond during 20092011. Specifically, do the following:

(i) For fiscal years 2009, 2010, and 2011, compute ROA (return on assets) defined as after-tax operating income divided by average total assets and its decomposition into return on sales (after-tax operating income divided by sales), and asset turnover (sales divided by average total assets). What are the major reasons for the change in ROA over this period (20092011)? How have the recent acquisitions affected Diamonds profitability and ROA of Diamond?

(ii) For fiscal years 2009, 2010, and 2011, compute the ROCE (return on common stockholders equity) defined as net income to common stockholders divided by average stockholders equity and its decomposition into profit margin for ROCE (net income to common stockholders divided by sales), asset turnover (sales divided by average total assets), and capital structure leverage (average total assets divided by average stockholders equity).

(iii) While Diamonds ROA and ROCE both went down in 2011 compared to 2009, the relative reduction in the ROCE is much less. Why?

(c) Refer to the statements of cash flows provided in Case Exhibit 2, Panel C. What are the likely reasons for changes in Diamonds cash position during 20062011?

(d) Has the short-term liquidity risk and long-term solvency risk of Diamond changed during 20072011? Is Diamond faced with the prospect of violating any of its debt covenants in 2011?

(e) At the end of FY 2011, did Diamond face a prospect of violating its debt covenants? Explain.

A B D 2020 10,000,000 (250,000) 9,750,000 2,500,000 5,500,000 (3,500,000) (4,500,000) 5,250,000 152,500 20,500 55,000 30,000 4 5 Book Income Statement 6 7 Sales 8 Returns 9 Net Sales 0 1 Beginning inventory 2 Purchases 3 Ending inventory 4 Cost of goods sold 5 Gross profit 6 7 Expenses: 8 Depreciation 9 Repairs 0 General insurance 1 Net premium - officer 2 life insurance 3 Officers' compensation 4 Other salaries 5 Utilities 6 Advertising 7 Legal and accounting fees 8 Charitable contributions 9 Payroll tax 0 Interest expense 1 Bad debt expense 2 3 Total expenses 4 5 6 Gain on sale of equipment 7 Interest on municipal bonds 8 Net gain on stock sales 9 Dividend income 0 1 Net income before FIT expense 2 Federal income tax (FIT) expense 3 State income tax expense 4 5 Net income per books 6 650,000 400,000 72,000 48,000 50,000 30,000 62,000 210,000 45,000 (1,825,000) 105,000 5,000 45,000 12,000 3,592,000 (742,560) (75,000) 2774440 A B D E F Book Balance Sheet Information January 1, 2020 Debit Decemer 31, 2020 Debit Account Credit Credit 516,774 400,000 815,494 500,000 20,000 25,000 2,500,000 260,000 30,000 60,000 200,000 2,000,000 3,500,000 50,000 30,000 80,000 200,000 2,000,000 100,000 140,000 750,000 1,100,000 187,500 205,000 100,000 100,000 Cash Accounts receivable Allowance for doubtful accounts 0 Inventory 1 Investment in corporate stock 2 Investment in municipal bonds 3 Cash surrender value of life insurance 4 Land 5 Buildings 6 Accum. Depreciation - buildings 7 Equipment 8 Accum. Depreciation - equipment 9 Trucks 0 Accum. Depreciation - trucks 1 Accounts payable 2 Notes payable (short-term) 3 Accrued payroll taxes 4 Accrued state income taxes 5 Accrued federal income taxes Bonds payable (long-term) 7 Deferred tax liability 8 Capital stock - common 9 Retained earnings - unappropriated o 1 Totals 2 30,000 300,000 800,000 14,880 4,500 2,500 1,800,000 57,394 1,500,000 2,000,000 50,000 270,000 640,000 18,600 7,500 77,361 600,000 167,593 1,500,000 4,674,440 6.816.774 6.816.774 8.375 494 8375 494 3 A B D 2020 10,000,000 (250,000) 9,750,000 2,500,000 5,500,000 (3,500,000) (4,500,000) 5,250,000 152,500 20,500 55,000 30,000 4 5 Book Income Statement 6 7 Sales 8 Returns 9 Net Sales 0 1 Beginning inventory 2 Purchases 3 Ending inventory 4 Cost of goods sold 5 Gross profit 6 7 Expenses: 8 Depreciation 9 Repairs 0 General insurance 1 Net premium - officer 2 life insurance 3 Officers' compensation 4 Other salaries 5 Utilities 6 Advertising 7 Legal and accounting fees 8 Charitable contributions 9 Payroll tax 0 Interest expense 1 Bad debt expense 2 3 Total expenses 4 5 6 Gain on sale of equipment 7 Interest on municipal bonds 8 Net gain on stock sales 9 Dividend income 0 1 Net income before FIT expense 2 Federal income tax (FIT) expense 3 State income tax expense 4 5 Net income per books 6 650,000 400,000 72,000 48,000 50,000 30,000 62,000 210,000 45,000 (1,825,000) 105,000 5,000 45,000 12,000 3,592,000 (742,560) (75,000) 2774440 A B D E F Book Balance Sheet Information January 1, 2020 Debit Decemer 31, 2020 Debit Account Credit Credit 516,774 400,000 815,494 500,000 20,000 25,000 2,500,000 260,000 30,000 60,000 200,000 2,000,000 3,500,000 50,000 30,000 80,000 200,000 2,000,000 100,000 140,000 750,000 1,100,000 187,500 205,000 100,000 100,000 Cash Accounts receivable Allowance for doubtful accounts 0 Inventory 1 Investment in corporate stock 2 Investment in municipal bonds 3 Cash surrender value of life insurance 4 Land 5 Buildings 6 Accum. Depreciation - buildings 7 Equipment 8 Accum. Depreciation - equipment 9 Trucks 0 Accum. Depreciation - trucks 1 Accounts payable 2 Notes payable (short-term) 3 Accrued payroll taxes 4 Accrued state income taxes 5 Accrued federal income taxes Bonds payable (long-term) 7 Deferred tax liability 8 Capital stock - common 9 Retained earnings - unappropriated o 1 Totals 2 30,000 300,000 800,000 14,880 4,500 2,500 1,800,000 57,394 1,500,000 2,000,000 50,000 270,000 640,000 18,600 7,500 77,361 600,000 167,593 1,500,000 4,674,440 6.816.774 6.816.774 8.375 494 8375 494 3