Question

9. An analysis of company performance using DuPont analysis A sheaf of papers in her hand, your friend and colleague, Chloe, steps into your office and asked the following. CHLOE: 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? CHLOE: 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. Eric, 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 Eric 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.

Answer 1

For first four blanks:

Blank 1: Net profit margin

Blank 3: Equity Multiplier

Blank 3: Use of debt vs equity financing

Blank 4: Control over its expenses

Ratios	Value	Correct/Incorrect	Ratios	Value	Correct/Incorrect
Profitability ratios			Asset management Ratios
Gross profit margin (%)	40.00	Correct	Total assets turnover	1.67	Correct
Operating profit margin (%)	11.64	Incorrect
Net profit margin (%)	12.61	Incorrect	financial ratios
Return on equity (%)	35.17	Incorrect	Equity multiplier	1.67	Incorrect

Ratios	Calculation				Value
Profitability ratios	Numerator		Denominator
Gross profit margin (%)	$    4,800,000	/	$ 12,000,000	=	40.00%
Operating profit margin (%)	$    1,800,000	/	$ 12,000,000	=	15.00%
Net profit margin (%)	$        907,920	/	$ 12,000,000	=	7.57%
Return on equity (%)	$        907,920	/	$    2,880,000	=	31.53%
Asset management Ratios
Total assets turnover	$ 12,000,000	/	$    7,200,000	=	1.67
financial ratios
Equity multiplier	$    7,200,000	/	$    2,880,000	=	2.50

Click all those apply:

Select options 1,2,4 since they are correct

Option 3 is incorrect since increased equity reduces return on equity.