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9. An analysis of company performance using DuPont analysis A shear of papers in his hand, your friend and colleague, Jason, steps 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 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 whether 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 Cash Accounts receivable $960,000 Accounts payable Accruals $800,000 1,600,000 2,400,000 4,800,000 Income Statement Data Sales $16,000,000 Cost of goods sold 9,600,000 Gross pront 6,400,000 Operating expenses 4,000,000 EBIT 2.400.000 Notes payable 320,000 1,280,000 2,560,000 2,220,000 Inventory Current assets Current liabilities Long term debt Balance Sheet Data Income Statement Data Cash $800,000 Sales 1,600,000 Accounts receivable Inventory 2,400,000 4,800,000 Current assets Accounts payable $960,000 Accruals 320,000 Notes payable 1,280,000 Current liabilities 2,560,000 Long-term debt 2,720,000 Total liabilities 5,280,000 Common stock 1,080,000 Retained earnings 3,240,000 Total equity 4,320,000 Total debt and equity $9,600,000 Cost of goods sold Gross profit Operating expenses EBIT Interest expense EBT $16,000,000 9,600,000 6,400,000 4,000,000 2,400,000 480,000 1,920,000 672,000 $1,248,000 Net fixed assets 4,800,000 Taxes Net Income Total assets $9,600,000 If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the turnover ratio, and the the total asset 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 strategles 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. Cepeus Manufacturing Inc. DuPont Analysis Value Correct/Incorrect Value Correct/Incorrect Ratios Asset management ratio Total assets turnover 40.00 Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 1.67 12.00 13.00 Financial ratios Equity multiplier 39.51 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: Do not round intermediate calculations and round your final answers up to two decimals. Cepeus Manufhcturing Inc. DuPont Analysis Calculation Value Numerator Denominator Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (9) Return on equity Calculation Value Numerator Denominator Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total assets turnover Financial 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 toples and identify general strategles that could be used to positively affect Cepeus's ROE. YOU: OK, so given your knowledge of the component ratlos used in the DuPont equation, which of the following strategies should imprve the company's ROE? So, now let's switch topics and Identify general strategies that could be used to positively affect Cepeus's ROE. YOU: OK, so given your knowledge of the component ratlos used in the DuPont equation, which of the following strategles should improve the company's ROE? eck 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 interest rate on Its notes payable or long-term debt obligations because it will reduce the company's net profit margin. Use more debt financing in its capital structure and increase the equity multiplier. Decrease the amount of debt financing used by the company, which will decrease the total assets turnover ratio. SON: 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