Back to Assignment Attempts 3.8 0.5 Keep the Highest 3.8/5 8. An analysis of company performance using DuPont analysis A sheaf of papers in his hand, your friend and colleague, Alex, steps into your office and asked the following ALEX: 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? ALEX: 1ve 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. Mla, 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 Mia 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 comaticambi $800,000 1600000 Accounts payable Accmals $960,000 320.00 $16,000,000 Sales Gostilnas sald 9.500.000 Ch 04- Assignment - Analysis of Financial Statements Balance Sheet Data Cash Accounts receivable Inventory $800,000 1,600,000 2,400,000 4,800,000 Current assets Income Statement Data Accounts payable $960,000 Sales $16,000,000 Accruals 320,000 Cost of goods sold 9,600,000 Notes payable 1,280,000 Gross profit 6,400,000 Current liabilities 2,560,000 Operating expenses 4,000,000 Long-term debt 2,640,000 EBIT 2,400,000 Total liabilities 5,200,000 Interest expense 470,400 Common stock 700,000 EBT 1,929,600 Retained earnings 2,100,000 Taxes 482,400 Total equity 2,800,000 Net income $1,447,200 Total debt and equity $8,000,000 Net fixed assets 3,200,000 Total assets $8,000,000 11 remember correctly, the DuPont equation breaks down our ROE into three component ratios the turnover ratio, and the the total asset 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 Ratios Value Correct/Incorrect Ratios Value Correct/Incorrect Profitability ratios Asset management ratio Garofit marain A. Value Correct/Incorrect Value Correct/Incorrect Ratios Asset management ratio Total assets turnover 2.00 40.00 Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 12.06 18.09 Financial ratios Equity multiplier 1.54 55.72 ALEX: 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. Hydra Cosmetics Inc. DuPont Analysis Calculation Value Numerator Denominator Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Patumaa con Calculation Value Numerator Denominator Ratios Profitability ratios Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total assets turnover Financial ratios Equity multiplier ALEX: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassmenti Mia would have been very disappointed in me if I had showed her my original work. So, now let's switch topics and identity general strategies that could be used to positively affect Hydra's ROE. YOU: OK, so given your knowledge of the component ratlos used in the DuPont equation, which of the following strategies should Improve the company's ROE? Check all that apply. Reduce the company's operating expenses, its cost of goods sold, and/or the interest rate on its borrowed funds because this will Ch 04- Assignment - Analysis of Financial Statements ALEX: 1 see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Mia would have been very disappointed in me if I had showed her my original work. So, now let's switch topics and Identity general strategies that could be used to positively affect Hydra's ROE. YOU: OK, so given your knowledge of the component ratils used in the DuPont equation, which of the following strategies should Improve the company's ROE? Check all that apply. Reduce the company's operating expenses, its cost of goods sold, and/or the interest rate on its borrowed funds because this will increase the company's net profit margin Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin Use more debt financing in its capital structure and increase the equity multiplier. Decrease the company's use of debt capital because it will decrease the equity multiplier ALEX: 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. Grade It Now Save & Continue Continue without saving