Indd 58 52708 82257 pm confirming pages figure 3 1

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Unformatted text preview: ,198 5,779 $12,870 $18,907 $ 2,328 352 5,260 $ 7,940 $14,415 $ 9,422 $31,777 58 PART 1 Overview ros82361_ch03.indd 58 5/27/08 8:22:57 PM Confirming Pages FIGURE 3 .1 Extended Du Pont Chart for Du Pont Return on equity 33.4% Return on assets 9.91% Multiplied by Equity multiplier 3.37 Profit margin 11.10% Multiplied by Total asset turnover 0.89 Net income $3,148 Divided by Sales $28,356 Sales $28,356 Divided by Total assets $31,777 Total costs $25,208 Subtracted from Sales $28,356 Fixed assets $18,907 Plus Current assets $12,870 Cost of goods sold $19,038 Selling, gen. & admin. expense $4,108 Depreciation $1,384 Accounts receivable $5,198 Cash $1,893 Interest $482 Inventory $5,779 Taxes $196 Using the information in Table 3.6, Figure 3.1 shows how we can construct an expanded Du Pont analysis for Du Pont and present that analysis in chart form. The advantage of the extended Du Pont chart is that it lets us examine several ratios at once, thereby getting a better overall picture of a company’s performance and also allowing us to determine possible items to improve. Looking at the left-hand side of our Du Pont chart in Figure 3.1, we see items related to profitability. As always, profit margin is calculated as net income divided by sales. But, as our chart emphasizes, net income depends on sales and a variety of costs, such as cost of goods sold (CoGS) and selling, general, and administrative expenses (SG&A expense). Du Pont can increase its ROE by increasing sales and also by reducing one or more of these costs. In other words, if we want to improve profitability, our chart clearly shows us the areas on which we should focus. Turning to the right-hand side of Figure 3.1, we have an analysis of the key factors underlying total asset turnover. Thus, for example, we see that reducing inventory holdings CHAPTER 3 Financial Statements Analysis and Long-Term Planning 59 ros82361_ch03.indd ros82361_ch03.indd 59 5/27/08 8:23:07 PM Confirming Pages through more efficient management reduces current assets, which reduces total assets, which then improves total asset turnover. 3 . 4 U S I N G F I N A N C I A L S TAT E M E N T I N F O R M AT I O N Our next task is to discuss in more detail some practical aspects of financial statement analysis. In particular, we will look at reasons for doing financial statement analysis, how to go about getting benchmark information, and some of the problems that come up in the process. Choosing a Benchmark Given that we want to evaluate a division or a firm based on its financial statements, a basic problem immediately comes up. How do we choose a benchmark, or a standard of comparison? We describe some ways of getting started in this section. TIME-TREND ANALYSIS One standard we could use is history. Suppose we found that the current ratio for a particular firm is 2.4 based on the most recent financial statement information. Looking back over the last 10 years, we might find that this ratio had declined fairly steadily over that period....
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This note was uploaded on 10/28/2009 for the course FINA 505 taught by Professor Deborahcernauskas during the Summer '09 term at Northern Illinois University.

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