Aa Aa 10. An analysis of company performance using DuPont analysis Walking down

Question

Aa Aa 10. An analysis of company performance using DuPont analysis Walking down the hall of your ofice building with a sheaf of papers in his hand, your friend and colleague, Alex, stepped into your office asked the following. Alex 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? Alex 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. Mia, 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 Mia 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 $12,000,000 6,000,000 6,000,000 3,000,000 3,000,000 403,200 Cash Accounts receivable Inventory 600,000 Accounts payable 1,200,000 Accruals 1,800,000 Notes payable 3,600,000 720,000 Sales 240,000 Cost of goods sold 60,000 Gross profit Current liabilities 1,920,000 Operating expenses Current assets 2,400,000 EBIT 4,320,000 Interest expense Long-term debt Total liabilities

Explanation / Answer

If I remember correctly, the Dupont equation breaks down our ROE into three component Ratio: The Net Margin Ratio , The Asset turnover ratio, and the Equity Multiplier. And,according to my understanding of the DoPont equation of ROE ,The three ratio provide insights into the company Profitability in relation to sales ,effectiveness in using the company s assets and amount of companies asset financed by Shareholders Equity Cepeus Manufacturing Inc DuPont Analysis Ratio Calculation Value Profitability Ratio Numerator / Denominator Gross profit margin 60,00,000 1,20,00,000 50 % Operating Profit margin 30,00,000 1,20,00,000 25 % Net Profit margin 16,87,920 1,20,00,000         14.07 % Return on Equity 16,87,920 2880000         58.61 % Asset Management Ratio Total Asset Turnover 1,20,00,000 72,00,000           1.67 Financing ratio Equity Multiplier 72,00,000 2880000           2.50 Reduce the company s operating expense, its COGS and /or interest rate on borrowed funds because this will increase the companies net profit margin Increase the efficency of its assets so that it generates more sales with each dollar of asset investment and increase the companys total asset turnover

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