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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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When a Dupont analysis reveals that a company has much higher than average asset turnover and much lower than average profit margin, what can be concluded about the company’s strategy?

a. It is a product differentiator. c. It has no strategy.

b. It needs to concentrate on improve- d. It is a low-cost provider

ing its profit margins.

To determine

Concept introduction:

DuPont Analysis is used to examine the Return on Equity (ROE) which is computed only after analyzing the Net Profit Margin, Asset turnover and Financial Leverage.

To explain:

The strategy of a company when DuPont analysis reveals that the company has much higher than average asset turnover and much lower than average profit margin.

Explanation

The product differentiators are those which has high profit margin than the average in the industry. As the company, here, has much lower profit margin than average, it cannot be termed as product differentiator. Thus, option (a) is not correct.

The company has much lower margin than average profit margin but on the same time has high asset turnover than average which helps in achieving profits by efficient use of its assets. So, there is no need to concentrate on improving profits separately. Thus, option (b) is not correct.

The company having high asset turnover will be working with various strategies in such a manner to use the assets in an efficient way so as to make good profits from it

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