Do not round intermediate calculations and round your final answers up to two decimals. Canis Major Veterinary Supplies Inc. DuPont Analysis Ratios Calculation Value Profitability ratios Numerator Denominator Gross profit margin (%) / = Operating profit margin (%) / = Net profit margin (%) / = Return on equity (%) / = Asset management ratio Total assets turnover / = Financial ratios Equity multiplier / =
Do not round intermediate calculations and round your final answers up to two decimals. Canis Major Veterinary Supplies Inc. DuPont Analysis Ratios Calculation Value Profitability ratios Numerator Denominator Gross profit margin (%) / = Operating profit margin (%) / = Net profit margin (%) / = Return on equity (%) / = Asset management ratio Total assets turnover / = Financial ratios Equity multiplier / =
Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Gary A. Porter, Curtis L. Norton
Chapter2: Financial Statements And The Annual Report
Section: Chapter Questions
Problem 2.1AP
Related questions
Question
This is all one question, I am sorry, they are long!
An analysis of company performance using DuPont analysis
A sheaf of papers in her hand, your friend and colleague, Madison, steps into your office and asked the following.
MADISON: 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?
MADISON: 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. Xavier, 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 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 | $1,300,000 | Accounts payable | $1,560,000 | Sales | $26,000,000 |
Accounts receivable | 2,600,000 | Accruals | 520,000 | Cost of goods sold | 13,000,000 |
Inventory | 3,900,000 | Notes payable | 2,080,000 | Gross profit | 13,000,000 |
Current assets | 7,800,000 | Current liabilities | 4,160,000 | Operating expenses | 6,500,000 |
Long-term debt | 3,640,000 | EBIT | 6,500,000 | ||
Total liabilities | 7,800,000 | Interest expense | 686,400 | ||
Common stock | 1,300,000 | EBT | 5,813,600 | ||
Net fixed assets | 5,200,000 | 3,900,000 | Taxes | 1,453,400 | |
Total equity | 5,200,000 | Net income | $4,360,200 | ||
Total assets | $13,000,000 | Total debt and equity | $13,000,000 |
If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the NET PROFIT MARGIN , GROSS PROFIT MARGIN the total asset turnover ratio, and the Equity Multiplier, EQUITY RATIO .
And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company’suse of debt versus equity financing or MANAGEMENT OF SHARES AND SALES PRICE , effectiveness in using the company’s assets, and MANGEMENT OF ITS LIQUITY AND TAX RECORDS/CONTROL OVER ITS EXPENSIVE .
Canis Major Veterinary Supplies Inc. DuPont Analysis
Ratios
|
Value
|
Correct/Incorrect
|
Ratios
|
Value
|
Correct/Incorrect
|
---|---|---|---|---|---|
Profitability ratios | Asset management ratio | ||||
Gross profit margin (%) | 50.00 | Total assets turnover | 2.00 | ||
Operating profit margin (%) | 22.36 | ||||
Net profit margin (%) | 33.54 | Financial ratios | |||
Return on equity (%) | 112.02 | Equity multiplier | 1.67 |
Canis Major Veterinary Supplies Inc. DuPont Analysis
Ratios
|
Value
|
Correct/Incorrect
|
Ratios
|
Value
|
Correct/Incorrect
|
---|---|---|---|---|---|
Profitability ratios | Asset management ratio | ||||
Gross profit margin (%) | 50.00 | Total assets turnover | 2.00 | ||
Operating profit margin (%) | 22.36 | ||||
Net profit margin (%) | 33.54 | Financial ratios | |||
Return on equity (%) | 112.02 | 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:
Do not round intermediate calculations and round your final answers up to two decimals.
Canis Major Veterinary Supplies Inc. DuPont Analysis
Ratios
|
Calculation
|
|
Value
|
||
---|---|---|---|---|---|
Profitability ratios | Numerator | Denominator | |||
Gross profit margin (%) |
|
/ |
|
= |
|
Operating profit margin (%) |
|
/ |
|
= |
|
Net profit margin (%) |
|
/ |
|
= |
|
Return on equity (%) |
|
/ |
|
= |
|
Asset management ratio | |||||
Total assets turnover |
|
/ |
|
= |
|
Financial ratios | |||||
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 cost and amount of assets necessary to generate each dollar of sales because it will increase the company’s total assets turnover.
Use more debt financing in its capital structure and increase the equity multiplier.
Use more equity financing in its capital structure, which will increase the equity multiplier.
Decrease the company’s use of debt capital because it will decrease the equity multiplier.
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.
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