4-23 DuPONT ANALYSIS SOLUTION
Taking the role of a financial analyst within the company, prepare an executive dashboard (performance report) on a large, publicly traded company of your choice (e.g., Cisco, Walmart, IBM, Apple, etc.) by computing and comparing its ratios against the 11 industry average ratios listed in Problem 4-23 on page 129 of the text.
It is imperative for you to understand the use of good academic writing (visit the Walden Writing Center), use of online library for academic resources (not internet sources), SEC.gov for financial filings (not annual reports from a company website), and most importantly, your job is to do vetting of anything companies claim on their websites. The use of Wikipedia, Investopedia, financial related websites, blogs, etc. is not appropriate for this competency.
- Use the provided Financial Ratio Excel Spreadsheet to show the computed financial ratios for your chosen company and industry averages. Prepare your performance report to show calculations for the 11 ratios listed on page 129, as well as a comparison of your computed ratios with industry averages. It is a good idea to be familiar with each industry’s classification! A good place to start is to look for the North American Industry Classification System (NAICS) and look for the industry of your chosen company through https://www.census.gov/eos/www/naics/. Please notice how it is a US Government website, not a “.com”. Then, visit the Walden University Library and access the IBIS World database in order to look for the appropriate industry standards: https://ezp.waldenulibrary.org/login?url=https://clients1.ibisworld.com. The comparisons, including a list of your computations in a table, should be added as an appendix to the memo described below and submitted as a separate Excel spreadsheet.
- Write a memo (approximately 2–3 pages) to your supervisor explaining your findings and your recommendations for where improvements are needed to increase financial health. Be sure to Include the following:
- Areas within the company that are both above and below industry standards
- An explanation of the limitations of using ratio analysis
- The qualitative factors that play a role in improving the company’s financial health
In the memo, suggest some specific ways in which the company can plan to improve below industry average ratio performance over time. Suggest annual targets over the next three years to catch up with or surpass industry averages. Explain why your recommendations should be effective.
DuPONT ANALYSIS A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the DuPont equation. The firm has no lease payments but has a $2 million sinking fund payment on its debt. The most recent industry average ratios and the firm’s financial statements are as follows:
|Industry Average Ratios|
|Current ratio||2×||Fixed assets turnover||6×|
|Total debt/Total assets||30%||Total assets turnover||3×|
|Times interest earned||7×||Profit margin||3%|
|EBITDA coverage||9×||Return on total assets||9%|
|Inventory turnover||10×||Return on common equity||12.86%|
|Days sales outstandinga||24 days|
aCalculation is based on a 365-day year.
|Balance Sheet as of December 31, 2012 (Millions of Dollars)|
|Cash and equivalents||$ 78||Accounts payable||$ 45|
|Net receivables||66||Notes payable||45|
|Inventories||159||Other current liabilities||21|
|Total current assets||$303||Total current liabilities||$111|
|Gross fixed assets||225||Common stock||114|
|Less depreciation||78||Retained earnings||201|
|Net fixed assets||$147||Total stockholders’ equity||$315|
|Total assets||$450||Total liabilities and equity||$450|
|Income Statement for Year Ended December 31, 2012 (Millions of Dollars)|
|Cost of goods sold||660.0|
|Earnings before interest and taxes (EBIT)||$ 49.5|
|Earnings before taxes (EBT)||$ 45.0|
|Net income||$ 27.0|
- Calculate those ratios that you think would be useful in this analysis.
- Construct a DuPont equation and compare the company’s ratios to the industry average ratios.
- Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?
- Which specific accounts seem to be most out of line relative to other firms in the industry?
- If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? How might you correct for such potential problems?