DuPont Analysis: Playing the Numbers Game!

"Numbers! I need to see numbers!" exclaimed Marcus in response to comments made by the assistant vice-president of Finance, Jeff Smith. Marcus Lenovo, the President and Chief Executive Officer of Plastichem Inc., had been instrumental in significantly increasing the company's size during his first five years in office. He spearheaded some successful marketing campaigns and revamped the production facilities by adopting the latest technology in injection molding. He also implemented various cost-cutting measures and introduced performance plans to boost efficiency. Foremen and supervisors were offered stock option incentives, and bonuses were tied to earnings per share (EPS) growth.

Plastichem Inc., a medium-sized plastic molding company, was founded in 1990 and was located in Midland, Michigan. The company supplied molded plastic products to various processing industries as well as end-users. It enjoyed a fairly diversified base of customers ranging from automobile and home products manufacturers to the federal government. After an initial period of sluggish growth, the firm's revenues and profits had almost quadrupled. Most of the increase had been achieved under the leadership of Andrew Sullivan. The plastics business offered potential for high profit margins and as a result it attracted many competitors. Despite the fierce competition, Plastichem's stock, which traded in the over-the-counter market, had tripled in value over the past five years making the shareholders very happy.

Recently, however, the stock price had dipped sharply, raising concerns among security analysts. Jeff Smith, the assistant VP of Finance, brought this matter to Andrew's attention informing him that the analysts had given their closest rival, DCM Molding, a "Strong Buy" rating while downgrading Plastichem's rating to a "Hold." This recent development had outraged shareholders and the Personal Relations department had been overwhelmed with calls from anxious owners wanting to know what was going on.

Marcus, a motivated leader, was not about to give up easily, however. His track record of turning companies around was very good. He knew that if he could identify the main problem areas, he would be able to make some strategic moves to alleviate the problems. He, therefore, demanded that he be given a detailed report of the firm's financial condition in comparison to that of DCM Molding. Andrew had learned over the years that in order to be successful it was very important to "play the numbers game."

Questions:

1. Jeff Smith realizes that the first thing he must do is compare the liquidity, leverage, activity, and profitability ratios of the two companies.Using the income statement and balance sheet data shown in Tables below, prepare a detailed comparison report indicating the strengths and weaknesses of each company.

2. Jim, a recently hired intern, has recommended that a DuPont analysis be done. How can such an analysis be performed and what information does it indicate about the relative performance of the two companies.

3. What are some of the limitations regarding the various analyses that have been suggested above?What additional data would Jim and Jeff need to improve their findings? Are there any other calculations and comparisons that would be helpful?

4. After collecting, compiling, and analyzing the data, what conclusions and recommendations would Jeff be justified in making in his report to Marcus?

5. In your opinion, how acute is the problem facing Duralex, Inc.? What strategic moves do you think Marcus could make to alleviate the problems?