Question

**An analysis of company performance using DuPont
analysis**

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

MADISON: 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?

MADISON: 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. Xavier, 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 Xavier 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 | $1,300,000 | Accounts payable | $1,560,000 | Sales | $26,000,000 |

Accounts receivable | 2,600,000 | Accruals | 520,000 | Cost of goods sold | 13,000,000 |

Inventory | 3,900,000 | Notes payable | 2,080,000 | Gross profit | 13,000,000 |

Current assets | 7,800,000 | Current liabilities | 4,160,000 | Operating expenses | 6,500,000 |

Long-term debt | 3,640,000 | EBIT | 6,500,000 | ||

Total liabilities | 7,800,000 | Interest expense | 686,400 | ||

Common stock | 1,300,000 | EBT | 5,813,600 | ||

Net fixed assets | 5,200,000 | Retained earnings | 3,900,000 | Taxes | 1,453,400 |

Total equity | 5,200,000 | Net income | $4,360,200 | ||

Total assets | $13,000,000 | Total debt and equity | $13,000,000 |

If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the NET PROFIT MARGIN , GROSS PROFIT MARGIN the total asset turnover ratio, and the Equity Multiplier, EQUITY RATIO .

And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company’suse of debt versus equity financing or MANAGEMENT OF SHARES AND SALES PRICE , effectiveness in using the company’s assets, and MANGEMENT OF ITS LIQUITY AND TAX RECORDS/CONTROL OVER ITS EXPENSIVE .

Canis Major Veterinary Supplies Inc. DuPont Analysis

Ratios |
Value |
Correct/Incorrect |
Ratios |
Value |
Correct/Incorrect |
---|---|---|---|---|---|

Profitability ratios | Asset management ratio | ||||

Gross profit margin (%) | 50.00 | Total assets turnover | 2.00 | ||

Operating profit margin (%) | 22.36 | ||||

Net profit margin (%) | 33.54 | Financial ratios | |||

Return on equity (%) | 112.02 | Equity multiplier | 1.67 |

Canis Major Veterinary Supplies Inc. DuPont Analysis

Ratios |
Value |
Correct/Incorrect |
Ratios |
Value |
Correct/Incorrect |
---|---|---|---|---|---|

Profitability ratios | Asset management ratio | ||||

Gross profit margin (%) | 50.00 | Total assets turnover | 2.00 | ||

Operating profit margin (%) | 22.36 | ||||

Net profit margin (%) | 33.54 | Financial ratios | |||

Return on equity (%) | 112.02 | Equity multiplier | 1.67 |

MADISON: 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.

Canis Major Veterinary Supplies 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 | / | = |

MADISON: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Xavier 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 Canis Major’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.

Increase the cost and amount of assets necessary to generate each dollar of sales because it will increase the company’s total assets turnover.

Use more debt financing in its capital structure and increase the equity multiplier.

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

Decrease the company’s use of debt capital because it will decrease the equity multiplier.

MADISON: 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.

Answer #1

Probability Ratios:

Gross Profit Margin= Gross Profit/Sales= 13000000/26000000= 50%

Operating Profit Margin= EBIT/Sales= 6500000/26000000= 25%

Net Profit Margin= Net Income/Sales= 4360200/26000000= 16.77%

Return on Equity= Net Income/Total Equity= 4360200/5200000= 83.85%

Asset Management Ratios:

Total Asset Turnover= Sales/Total Assets= 26000000/13000000= 2

Financial Ratios:

Equity Multiplier= Total Assets/Total Equity= 13000000/5200000= 2.5

For improving the company's ROE, Use more debt financing in its capital structure, and increase the equity multiplier. (Option B)

All the other suggestions are false, as Option A decreases total asset turnover, Option C decreases equity multiplier and Option D decreases company's ROE.

The DuPont equation
Corporate decision makers and analysts often use a particular
technique, called a DuPont analysis, to better understand the
factors that drive a company’s financial performance, as reflected
by its return on equity (ROE). By using the DuPont equation, which
disaggregates the ROE into three components, analysts can see why a
company’s ROE may have changed for better or worse and identify
particular company strengths and weaknesses.
The DuPont Equation
A DuPont analysis is conducted using the DuPont...

14. The DuPont equation
Corporate decision makers and analysts often use a technique
called DuPont analysis to understand and assess the factors that
drive a company’s financial performance, as measured by its return
on equity (ROE). Depending on the version used, the DuPont equation
will deconstruct the firm’s ROE, its best measure of financial
performance, into two or three important factors, or drivers.
DuPont analysis can be conducted using either the traditional
DuPont equation or the extended DuPont equation. The...

The DuPont equation
Corporate decision makers and analysts often use a particular
technique, called a DuPont analysis, to better understand the
factors that drive a company’s financial performance, as reflected
by its return on equity (ROE). By using the DuPont equation, which
disaggregates the ROE into three components, analysts can see why a
company’s ROE may have changed for better or worse and identify
particular company strengths and weaknesses.
The DuPont Equation
A DuPont analysis is conducted using the DuPont...

The DuPont System determines the ROE of a firm as the product of
the firm's profit margin, equity multiplier, and it's______.
Question 40 options:
Current Ratio
Inventory Turnover
Total Asset Turnover
Fixed Asset Turnover

A company is evaluating their financial performance and digging
into their ratios. The company wants to keep the same Return on
Equity (ROE) (as it looks good) but they are faced with the reality
that their total asset turnover ratio as well as their net profit
margin are declining. What can management do?
A. reduce their revenue while increasing the quality of assets
on their balance sheet
B. decrease their leverage (equity multiplier)
C. increase their leverage (equity multiplier)
D....

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.
1-Increase the firm’s bottom-line profitability for the same
volume of sales, which will increase the company’s net profit
margin.
2- Decrease the company’s use of debt capital because it will
decrease the equity multiplier.
3-Reduce the company’s operating expenses, its cost of goods
sold, and/or the interest rate on its borrowed funds because this...

Coca-Cola
Purpose Financial ratio analysis is one of the best techniques
for identifying and evaluating internal strengths and weaknesses.
Potential investors and current shareholders look closely at firms’
financial ratios, making detailed comparisons to industry averages
and to previous periods of time. Financial ratio analyses provide
vital input information for developing an IFE Matrix
Financial Ratios for Coca-Cola (2018)
Liquidity Ratios:
- Current ratio:
- Quick ratio:
Leverage Ratios:
- Debt-to-total-assets ratio:
- Debt-to-equity ratio:
- Long-term debt-to-equity ratio:
-...

Compute Measures for DuPont Disaggregation
Analysis
Use the information below for 2018 for 3M Company to answer the
requirements (perform these computations from the perspective of a
3M shareholder).
($ millions)
2018
2017
Sales
$32,765
Net income, consolidated
5,363
Net income attributable to 3M shareholders
5,349
Assets
36,500
$37,987
Total equity
9,848
11,622
Equity attributable to 3M shareholders
9,796
11,563
a. Compute return on equity (ROE).
Round answer to two decimal places (ex: 0.12345 = 12.35%)
b. Compute the DuPont...

One. The famous Dupont Identity breaks Return on Equity (ROE)
into three components: Profit Margin, Total Asset Turnover, and
Financial Leverage (Assets/Equity).
French Corp. has an Asset/Equity ratio of 1.55. Their current
Total Asset Turnover has recently fallen to 1.20, bringing their
ROE down to 9.1%
a) What is this firm's Profit Margin?
B) If the company were able to improve its Total Asset Turnover
to 1.8, what would be their new ROE?
Two. Sousa, Inc., has Sales of $37.3...

P3-36: DuPont system of analysis Use the
following 2016 financial information for ATT and Verizon to conduct
a DuPont system of analysis for each company.
ATT
Verizon
Sales
$163,786
$125,980
Earnings available for common stockholders
13,333
13,608
Total assets
403,821
244,180
Stockholders’ equity
124,110
24,032
Which company has the higher net profit margin? Higher asset
turnover?
Which company has the higher ROA? The higher ROE?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 7 minutes ago

asked 9 minutes ago

asked 13 minutes ago

asked 17 minutes ago

asked 19 minutes ago

asked 38 minutes ago

asked 39 minutes ago

asked 45 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago