Question

LANDON: 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? LANDON: 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. Amelia, 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. Here are the balance sheet and income statement data that Amelia 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 $700,000 Accounts payable $840,000 $14,000,000 7,000,000 Accounts receivable 1,400,000 Accruals Sales Cost of goods sold Gross profit 280,000 Inventory 2,100,000 Notes payable 1,120,000 $7,000,000 Current assets $4,200,000 Current liabilities $2,240,000 Operating expenses 3,500,000 Long-term debt 3,640,000 EBIT $3,500,000 Total liabilities $5,880,000 Interest expense 571,200 Common stock 980,000 EBT $2,928,800 Net fixed assets 5,600,000 Retained earnings 2,940,000 Taxes 1,025,080 Total equity $3.920,000 Net income $1,903,720 Total assets $9,800,000 Total debt and equity $9,800,000

Answer 1

First part of the question

DuPont = net profit margin X asset turnover X financial leverage

The three ratios provides insight into the companies operating efficiency, asset use efficency and financial leverage.

Please note that I have combined second and third part of the question. The ratios have been calculated and I have given a comment after each calculation whether the figure matches with the ones provided in the question.

gross profit ratio	(gross profit / sales)*100
gorss proift	7000000
sales	14000000
gross profit ratio	50%
the provided answer in the question is correct
operating profit margin	(operating profit / sales)*100
operating profit	3500000
sales	14000000
operating profit	25%
the provided answer in the question is not correct
net profit margin	(net income / sales)*100
net income	1903720
sales	14000000
net profit margin	14%
the provided answer in the question is not correct
return on equity	net income / shareholders equity
net income	1903720
total equity	3920000
return on equity	49%
the provided answer in the question is not correct
total asset turnover	net sales / total assets
sales	14000000
total ending assets	9800000
total asset turnover	1.43
the provided answer in the question is correct
equity multiplier	total assets / shareholders equity
total ending assets	9800000
total equity	3920000
equity multiplier	2.50
the provided answer in the question is not correct