Question

Exercise 4-28 (Algo) DuPont analysis [LO4-10]

The following condensed information was reported by Peabody Toys, Inc., for 2021 and 2020:

	($ in thousands)
	2021				2020
Income statement information
Net sales	$	5,600			$	4,600
Net income		294				132
Balance sheet information
Current assets	$	840			$	790
Property, plant, and equipment (net)		1,460				1,110
Total assets	$	2,300			$	1,900
Current liabilities	$	1,020			$	670
Long-term liabilities		790				790
Common stock		300				300
Retained earnings		190				140
Liabilities and shareholders’ equity	$	2,300			$	1,900

Required:

1. Determine the following components of the DuPont framework for 2021:
2. Write an equation that relates these components in calculating ROE. Use the Peabody Toys data to show that the equation is correct.

Answer 1

($ in thousands)

Requirement 1

a.Profit Margin on sales = Net Income / Sales = 294 / 5600 = 5.25%

b.Asset Turnover = Sales / Avg.Total assets = 5600 / (2300 + 1900 ) / 2 = 5600 / 2100 = 2.66666

c.Equity Multiplier = Total Assets / Total Shareholders Equity = (2300 + 1900 ) / 2 / ( 490 + 440 ) / 2 = 2100 / 465 = 4.51612903

d.Return on Shareholders Equity = Net Income / Avg.Total Shareholders Equity = 294 / ( 490 + 440 ) / 2 = 294 / 465 = 63.22%

Requirement 2

Profit Margin x Asset Turnover x Equity Multiplier = 5.25% x 2.6666 x 4.51612903 = 63.22%