An analysis of company performance using DuPont analysis 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, Ive got a meeting in an hour, but I dont want to start something new and then be interrupted by the meeting, so how can I help? MADISON: Ive been reviewing the companys financial statements and looking for general ways to improve our performance, in general, and the companys return on equity, or ROE, in particular. Xavier, my new team leader, suggested that I start by using a DuPont analysis, and Id like to run my numbers and conclusions by you, to see if Ive 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 Cash Accounts payable $1,560,000 Sales Accounts receivable $1,300,000 2,600,000 3,900,000 Accruals Cost of goods sold 520,000 2,080,000 Inventory Notes payable Gross profit $26,000,000 13,000,000 $13,000,000 6,500,000 $6,500,000 Current assets $7,800,000 Current liabilities $4,160,000 Operating expenses Long-term debt EBIT 3,640,000 $7,800,000 Total liabilities Interest expense 686,400 Common stock EBT Net fixed assets 5,200,000 Retained earnings 1,300,000 3,900,000 $5,200,000 Taxes $5,813,600 2,034,760 $3,778,840 Total equity Net income Total assets $13,000,000 Total debt and equity $13,000,000 the total asset If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the 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. In the dropdown lists next to your values I'm going to select correct if your calculation is correct and incorrect if your calculation is incorrect. Canis Major Veterinary Supplies Inc. DuPont Analysis Ratios Value Correct/Incorrect Ratios Value Correct/Incorrect Profitability ratios Asset management ratio 50.00 Total asset turnover 2.00 22.36 Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Return on equity (%) 29.07 Financial ratios 97.09 Equity multiplier 1.67 MADISON: 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: Note: Do not round intermediate calculations. Round final answers to the nearest whole number. Canis Major Veterinary Supplies Inc. DuPont Analysis Calculation Value Profitability ratios Numerator Denominator Gross profit margin (%) / = = Operating profit margin (%) Net profit margin (%) Return on equity (%) Asset management ratio Total asset turnover Financing ratios II Equity multiplier MADISON: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Xavier would have been very disappointed in me if I had showed him my original work. So, now let's switch topics and identify general strategies that could be used to positively affect Canis Major's ROE. YOU: OK, so given your knowledge of the component ratios used in the DuPont equation, which of the following strategies should improve the company's ROE? Check all that apply. Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin. 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. Use more debt financing in its capital structure and increase the equity multiplier. Increase the cost and amount of assets necessary to generate each dollar of sales because it will increase the company's total asset turnover. MADISON: 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