Question

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.

the dropdown option for the first question: net profit margin OR operating profit margin // debt ratio OR equity multiplier.

the dropdown option for the second question: shareholder and dividend management OR use of debt versus equity financing // management of its revenues and depreciation methods OR control over its expenses

Answer 1

If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the Net profit margin , the total assets turnover ratio , and the Equity multiplier

And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratio provide insights into the company's Control over its expense ,effectiveness in using the company's assets and use of debt vs equity financing.

Cepeus manufacturing inc. DuPont Analysis

Ratios	Value	Correct/Incorrect	Ratios	Value	Correct/Incorrect
Profitability ratios			Asset management ratio
Gross profit Margin	40.00	CORRECT	Total assets Turnover	1.67	CORRECT
Operating profit margin	12.00	INCORRECT	Financial Ratios
Net profit margin	15.00	INCORRECT	Euity Multiplier	1.82	INCORRECT
Return on equity	45.59	INCORRECT

RATIOS	CALCULATION
Profitability ratios	Numerator	Deniminator	Value
Gross Profit Margin (%)	Gross profit $6,400,000/	sales $16,000,000	=40.00
Operating profit margin(%)	Operating Profit $2,400,000/	Sales $16,000,000	=15.00
Net Profit Margin (%)	Net Income $1,440,000/	Sales $16,000,000	=9.00
Return on equity (%)	Net Income $ 1,440,000/	equity $4,320,000	=33.33
Asset management Ratio
Total Assets Turnover	sales $16,000,000/	total assets $9,600,000	=1.66
Financial ratio
Equity Multiplier	Total assets $9,600,000/	Equity $4,320,000	=2.22

which of the following strategies should improve the company's ROE?

1) Use more debt financing in its capital structure and increase the equity multiplier.