Madison I\'ve been reviewing the company\'s financial statements and looking for

Question

Madison 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. Xavier, my new team leader, suggested that I start 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 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 $30,000,000 15,000,000 15,000,000 7,500,000 7,500,000 882,000 6,618,000 2,316,300 $4,301,700 $1,500,000 Accounts payable $1,800,000 Sales Accounts receivable 3,000,000 Accruals 4,500,000 Notes payable 9,000,000 600,000 Cost of goods sold 2,400,000 Gross profit 4,800,000 Operating expenses 4,950,000 EBIT 9,750,000 Interest expense 1,312,500 EBT 3,937,500 Taxes 5,250,000 Net income Inventory Current assets Current liabilities Long-term debt Total liabilities Net fixed assets 6,000,000 Retained earnings Total equity Total debt and equity Total assets $15,000,000 $15,000,000 If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the operating profit marginthe total asset turnover ratio, and thedebt ratio And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights

Explanation / Answer

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

And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company's net profitability, effectiveness in using the company's assets, and capital structure.

Note: Please check the boxes in the earlier table as per the ratios calculated here. Only the gross profit margin, and the total asset turnover ratios are correct.

Strategies to improve the company's ROE:

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

Increase the efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company's total asset turnover.

Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin.

Hydra Cosmetics Inc. DuPont Analysis Ratios Calculation Value Profitability ratios Numerator / Denominator = Gross profit margin (%) 15000000 / 30000000 = 50 Operating profit margin (%) 7500000 / 30000000 = 25 Net profit margin (%) 4301700 / 30000000 = 14.34 Return on equity (%) 4301700 / 5250000 = 81.94 Asset management ratio Total asset turnover 30000000 / 15000000 = 2.0 Financing ratios Equity multiplier 15000000 / 5250000 = 2.86

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