If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the (gross profit margin/ net profit margin) , the total asset turnover ratio, and the (equity ratio/ equity multiplier) .

And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the companys (management of its sales and share price/ use of debt versus equity financing) , effectiveness in using the companys assets, and (management of its liquidity and its tax records/ control over its expenses) .

10. An analysis of company performance using DuPont analysis Walking down the hall of your office building with a sheaf of papers in her hand, your friend and colleague, Chloe, stepped into your office and asked the following. CHLOE: 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? CHLOE: 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. Eric, 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 Eric 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. Income Statement Data Cash $12,000,000 Accounts receivable Inventory Balance Sheet Data $600,000 Accounts payable 1,200,000 Accruals 1,800,000 Notes payable $3,600,000 Current liabilities Long-term debt Total liabilities Common stock 3,600,000 Retained earnings Total equity $7,200,000 Total debt and equity Sales Cost of goods sold Gross profit Operating expenses EBIT Current assets $720,000 240,000 960,000 $1,920,000 2,400,000 $4,320,000 720,000 2,160,000 $2,880,000 $7,200,000 7,200,000 $4,800,000 3,000,000 $1,800,000 403,200 $1,396,800 Interest expense EBT Taxes Net income Net fixed assets sets 488,880 $907,920 Total assets , 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 Now, let's see your notes with your ratios, and then we can talk about possible strategies that will improve the ratios. In the dropdown lists next to your values I'm going to select correct if your calculation is correct and incorrect if your calculation is incorrect. Now, let's see your notes with your ratios, and then we can talk about possible strategies that will improve the ratios. In the dropdown lists next to your values I'm going to select correct if your calculation is correct and incorrect if your calculation is incorrect. Hydra Cosmetics Inc. DuPont Analysis Ratios Value Correct/Incorrect Ratios Value Correct/Incorrect Profitability ratios Asset management ratio Gross profit margin (%) 40.00 Total asset turnover 1.67 Operating profit margin (%) Net profit margin (%) Return on equity (%) 11.64 12.61 35.10 Financial ratios Equity multiplier 1.67 - CHLOE: 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: Note: Do not round intermediate calculations. Round final answers to the nearest whole number. Hydra Cosmetics Inc. DuPont Analysis Calculation Value Numerator Denominator Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total asset turnover Financing ratios Equity multiplier CHLOE: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Eric would have been very disappointed in me if I had showed him 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 debt financing in its capital structure and increase 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. O Decrease the amount of debt financing used by the company, which will decrease the total asset turnover ratio. O Increase the interest rate on its notes payable or long-term debt obligations because it will reduce the company's net profit margin. CHLOE: 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. 10. An analysis of company performance using DuPont analysis Walking down the hall of your office building with a sheaf of papers in her hand, your friend and colleague, Chloe, stepped into your office and asked the following. CHLOE: 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? CHLOE: 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. Eric, 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 Eric 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. Income Statement Data Cash $12,000,000 Accounts receivable Inventory Balance Sheet Data $600,000 Accounts payable 1,200,000 Accruals 1,800,000 Notes payable $3,600,000 Current liabilities Long-term debt Total liabilities Common stock 3,600,000 Retained earnings Total equity $7,200,000 Total debt and equity Sales Cost of goods sold Gross profit Operating expenses EBIT Current assets $720,000 240,000 960,000 $1,920,000 2,400,000 $4,320,000 720,000 2,160,000 $2,880,000 $7,200,000 7,200,000 $4,800,000 3,000,000 $1,800,000 403,200 $1,396,800 Interest expense EBT Taxes Net income Net fixed assets sets 488,880 $907,920 Total assets , 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 Now, let's see your notes with your ratios, and then we can talk about possible strategies that will improve the ratios. In the dropdown lists next to your values I'm going to select correct if your calculation is correct and incorrect if your calculation is incorrect. Now, let's see your notes with your ratios, and then we can talk about possible strategies that will improve the ratios. In the dropdown lists next to your values I'm going to select correct if your calculation is correct and incorrect if your calculation is incorrect. Hydra Cosmetics Inc. DuPont Analysis Ratios Value Correct/Incorrect Ratios Value Correct/Incorrect Profitability ratios Asset management ratio Gross profit margin (%) 40.00 Total asset turnover 1.67 Operating profit margin (%) Net profit margin (%) Return on equity (%) 11.64 12.61 35.10 Financial ratios Equity multiplier 1.67 - CHLOE: 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: Note: Do not round intermediate calculations. Round final answers to the nearest whole number. Hydra Cosmetics Inc. DuPont Analysis Calculation Value Numerator Denominator Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total asset turnover Financing ratios Equity multiplier CHLOE: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Eric would have been very disappointed in me if I had showed him 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 debt financing in its capital structure and increase 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. O Decrease the amount of debt financing used by the company, which will decrease the total asset turnover ratio. O Increase the interest rate on its notes payable or long-term debt obligations because it will reduce the company's net profit margin. CHLOE: 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