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tory Bookmarks People Window Help x y ? Aplia: Student Question e https://courses.aplia.com/af/servlet/quiz?quiz action takeQuiz&quiz; probGuid QNAPCOAB010100000041ca25b00c0000&ct; 9. An analysis of company performance using DuPont analysis Walking down the hall of your office building with a sheaf of papers in his hand, your friend and coileague, Jason, stepped into your office and asked the fo lowing Jason Do you have 10 or 15 minutes that you can spare? 98 how can I help? I've been reviewing the company's financial statements and looking for general ways to improve our performance, in using a DuPont analysis, and I'd like to run my numbers and condusions by you, to see if Here are the balance sheet and income statement data that Anja gave me, and here are my notes Jason company's return on equity, or ROE, in particular. Anja, my new team leader, suggested that I start by I've missed anything. Could you start by making sure that my numbers are correct? to look at these financial statements and to remember what 1 know about the DuPont analysis Balance Sheet Data $1,000,000 Accounts payable Income Statement Data Cash $1,200,000 Sales 2,000,000 Accruals 3,000,000 Notes payable 6,000,000 Current labilities 400,000 Cost of goods sold 1,600,000 Gross profit $20,000,000 10,000,000 10,000,000 Accounts receivable Current assets ,200,000 Operating expenses ,00,000 2,800,000 EBIT 6,000,000 Interest expense 1,000,000 EST ,000,000 Taxes 4,000,000 Net income Long-term debt 5,000,000 Total liabilities 528,000 ,472,000 1,565,200 2,906,800 Common stock Net fixed assets ,000,000Retained earnings Total equity Total assets 10,000,000 Total debt and equity $10,000,000 It I remember correctly, the DuPont equation breaks down our ROt into three component ratios: the the total asset turnover ratio, and the to my understanding of the DuPont calculation of ROE, the three ratios provide insig

Explanation / Answer

General Explantion:

Du Pont analysis breaks down ROE into three components - net profit margin, asset turnover ratio and equity multiplier. This helps to understand the granular detail about what is driving the ROE of the company.

ROE = Net profit margin * Total Asset Turnover ration * Equity Multiplier

ROE = (Net Income/Sales) * (Sales/Total Assets) * (Total Assets/Equity)

ANSWERS

Fill in the blanks portion:

If I remember correctly, the DuPont breaks down our ROE into three components ratios: the net profit margin, the total asset turnover ratio and the equity multiplier.

And, according to my understanding of DuPont equation and its calculation of ROE,the three ratios provide insights into the company's use of debt vs equity financing, effectiveness in using company's assets and control over its expenses.

Choose the correct ratio portion & Calculation of Each ratio

Gross Profit margin = Gross Profit/Sales = 10,000,000/20,000,000 = 50% (Correct)

Operating Profit margin = Operating profit (EBIT)/Sales = 5,000,000/20,000,000 = 25% (Incorrect)

Net Profit Margin = Net Profit/Sales = 2,906,800/20,000,000 = 14.53% (Incorrect)

ROE = Net Income/Equity = 2,906,800/4,000,000 = 72.67% (Incorrect)

Total Asset Turnover = Sales/Total Assets = 20,000,000/10,000,000 = 2 (Correct)

Equity Multiplier = Total Assets/Equity = 10,000,000/4,000,000 = 2.5 (Incorrect)

Multiple Choice Question

Looking at the ratios breakdown for ROE by DuPont, we see that ROE can be increased by increasing net profit margin (increasing net income on same level of sales), using more debt in capital structure (since this will reduce the equity amount and hence increase the Equity multiplier) or increase the asset turnover (or the efficiency with which assets produce sales). Hence going by this the correct options are: Option 1 and Option 2

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