10. An analysis of company performance using DuPont analysis a AaE Walking down

Question

10. An analysis of company performance using DuPont analysis a AaE Walking down the hall of your office building with a sheaf of papers in her hand, your friend and colleague, Madison, stepped 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? 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 by using a DuPont analysis, and I'd like to run my numbers and conclusions by you, to see if I've missed anything. Madison 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 $1,560,000Sales $26,000,000 Cash Accounts receivable Inventory $1,300,000 Accounts payable 520,000 Cost of goods sold13,000,000 13,000,000 7,800,000 Current liabilities 4,160,000 Operating expenses 6,500,000 6,500,000 967,200 5,532,800 1,936,480 $3,596,320 2,600,000 Accruals 3,900,000 Notes payable 2,080,000Gross profit Current assets 5,980,000 EBIT 10,140,000 Interest expense 1,365,000 EBT 4,095,000 Taxes 5,460,000 Net income Long-term debt Total liabilities Common stock Net fixed assets 7,800,000 Retained earnings Total equity Total assets $15,600,000 Total debt and equity $15,600,000 If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the , the total asset turnover ratio, and the And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company's , effectiveness in using the company's assets, and Now, let's see your notes with your ratios, and then we can talk about possible strategies that will improve the ratios. I'm going to check the box to the side of your calculated value if your calculation is correct and leave it unchecked if your calculation is incorrect. Hydra Cosmetics Inc. DuPont Analysis Check if Correct Check if Ratios Value Ratios Value Correct

Explanation / Answer

1st Blank: net profit margin

2nd blank: Leverage ratio

3rd Blank: profitability

4th Blank: financial leverage

Only gross profit margin and total turnover ratio is correct.

gross profit margin = gross profit /sales

operating profit margin = EBIT/sales

Net proft margin = net income/ sales

Return on equity = net income/ total equity

asset turnover ratio = sales/total asset

equity multiplier = total asset/equity

Numerator Denominator Value Gross Profit Margin 13000000 26000000 50% Operating Profit Margin 6500000 26000000 25.00% Net Profit Margin 3596320 26000000 13.83% Return on equity 3596320 5460000 65.87% Total Asset Turnover 26000000 15600000 1.67 Equity Multiplier 15600000 5460000 2.86

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