Question

Du Pont Analysis. Keller Cosmetics maintains an operating profit margin of 5% and asset turnover ratio of 3.

a. what is ROA?

b. If its debt-equity ratio is 1, its interest payments and taxes are each 8000, and EBIT is 20,000 what is its ROE?

* I know ROA is Asset Turnover x OPM which gives me .15. How do I analyze this? Is it for every dollar spent on assets you get a return of 15%.

Also How do I solve for b. Please give me step by step instructions. For the ROE, I was able to solve for NI given the EBIT, Interest Pay, and Tax. This is 4000. However I don't know how to solve for equity to find ROA. Can you give me step by step instructions/full explanations on how to calculate equity?

Answer 1

1: ROA = Operating income/ Total assets

= Operating profit margin* Asset turnover

= 5%*3

=15%

This implies that the company earns 15% operating income for every dollar of asset employed.

2: First we find the Net Income

Net Income = EBIT- Interest- Taxes

= 20000-8000-8000

=4000

Then we derive Sales

Operating profit margin = EBIT/Sales

5%=20000/Sales

Sales = 400000

Find Total assets using TAT ratio

3= Sales/ Total assets

3= 400000/ Total assets

Total assets = 400000/3 = 133333.33

Equity = 50%*Total assets = 66666.67

ROE = Net Income/ Equity

=4000 /66666.67

=6%