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9. An analysis of company performance using DuPont analysis A sheaf of papers in his hand, your friend and colleague, Jason, steps into your office and asked the following. JASON: 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? JASON: I've 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. Anja, 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 Anja 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 $800,000 Accounts payable $960,000 1,600,000 320,000 Cash Accounts receivable Inventory Current assets 2,400,000 1,280,000 Income Statement Data Sales $16,000,000 Cost of goods sold 9,600,000 Gross profit 6,400,000 Operating expenses 4,000,000 EBIT 2,400,000 Interest expense 480,000 EBT 1,920,000 4,800,000 2,560,000 Accruals Notes payable Current liabilities Long-term debt Total liabilities Common stock Retained earnings Total equity Total debt and equity 2,720,000 5,280,000 1,080,000 Net fixed assets 4,800,000 3,240,000 Taxes 480,000 4,320,000 Net income $1,440,000 Total assets $9,600,000 $9,600,000 Do not round intermediate calculations and round your final answers up to two decimals. Cepeus Manufacturing Inc. DuPont Analysis Value Calculation 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 III II JASON: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Anja would have been very disappointed in me if I had showed her my original work. So, now let's switch topics and identify general strategies that could be used to positively affect Cepeus'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. Use more equity financing in its capital structure, which will 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 assets turnover. Decrease the amount of debt financing used by the company, which will decrease the total assets turnover ratio. Use more debt financing in its capital structure and increase the equity multiplier. JASON: 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

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