$\backslash$table$[[$Balance Sheet Data,Income Statement Data$],[$Cash$,$$$1,400,000,$Accounts payable,$$1,680,000,$Sales,$$28,000,000],[$Accounts receivable,$2,800,000,$Accruals,$560,000,$Cost of goods sold,$14,000,000],[$Inventory$,4,200,000,$Notes payable,$2,240,000,$Gross profit,$14,000,000],[$Current assets,$8,400,000,$Current liabilities,$4,480,000,$Operating expenses,$7,000,000],[,$Long$-$term debt,$5,320,000,$EBIT,$7,000,000],[,$Total liabilities,$9,800,000,$Interest expense,$907,200],[,$Common stock,$1,9.$ An analysis of company performance using DuPont analysis

A sheaf of papers in his hand, your friend and colleague, Landon, steps into your office and asked the following.

LANDON: 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?

LANDON: I$$ve been reviewing the company$$s financial statements and looking for ways to improve our performance, in general, and the company$$s return on equity, or ROE, in particular. Amelia, my new team leader, suggested that I start by using a DuPont analysis, and I$$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 Amelia 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

Cash $$1,400,000$ Accounts payable $$1,680,000$ Sales $$28,000,000$

Accounts receivable $2,800,000$ Accruals $560,000$ Cost of goods sold $14,000,000$

Inventory $4,200,000$ Notes payable $2,240,000$ Gross profit $14,000,000$

Current assets $8,400,000$ Current liabilities $4,480,000$ Operating expenses $7,000,000$

Long$-$term debt $5,320,000$ EBIT $7,000,000$

Total liabilities $9,800,000$ Interest expense $907,200$

Common stock $1,050,000$ EBT $6,092,800$

Net fixed assets $5,600,000$ Retained earnings $3,150,000$ Taxes $1,523,200$

Total equity $4,200,000$ Net income $$4,569,600$

Total assets $$14,000,000$ Total debt and equity $$14,000,000$

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.

Pavo Media Systems Inc. DuPont Analysis

Ratios

Value

Correct$/$Incorrect

Ratios

Value

Correct$/$Incorrect

Profitability ratios Asset management ratio

Gross profit margin $(\%)50\mathrm{.}00$ Total assets turnover $2\mathrm{.}00$

Operating profit margin $(\%)21\mathrm{.}76$

Net profit margin $(\%)32\mathrm{.}64$ Financial ratios

Return on equity $(\%)93\mathrm{.}35$ Equity multiplier $1\mathrm{.}43$

LANDON: 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.

Pavo Media Systems 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 assets turnover $/=$

Financial ratios

Equity multiplier $/=$

LANDON: I see what I did wrong in my computations. Thanks for reviewing these calculations with me$.$ You saved me from a lot of embarrassment! Amelia would have been very disappointed in me if I had showed her my original work.

So$,$ now let$$s switch topics and identify general strategies that could be used to positively affect Pavo$$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.

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.

Use more equity financing in its capital structure, which will increase the equity multiplier.

Increase the efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company$$s total assets turnover.

Decrease the amount of debt financing used by the company, which will decrease the total assets turnover ratio.

LANDON: 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.