Company B and Company C had the following DuPont framework ratio values for Year 3:
|
|
Company B
|
Company C
|
|
Return on sales
|
69%
|
201%
|
|
Asset turnover
|
259
|
089
|
|
Assets-to-equity ratio
|
203
|
203
|
Which company-A, B, or C-had the highest ROE in Year 3? Comment on your results.
Computing the Dupont Framework Ratios
Compute the following ratios for Year 1,Year 2, and Year 3 for Company A:
1. Return on equity
2. Return on sales
3. Asset turnover
4. Assets-to-equity ratio
Preparing a Common-Size Income Statement
Company A reported the following income statement data for the most recent three years:
|
|
Year 3
|
Year 2
|
Year 1
|
|
Sales
|
$120,000
|
$90,000
|
$100,000
|
|
Cost of goods sold
|
(55,000)
|
(47,000)
|
(48,000)
|
|
Operating expenses:
|
|
|
|
|
Marketing expense
|
(7,000)
|
(7,000)
|
(6,000)
|
|
R&D expense
|
(15,000)
|
(4,000)
|
(10,000)
|
|
Administrative expense
|
(20,000)
|
(22,000)
|
(20,000)
|
|
Operating income
|
$ 23,000
|
$10,000
|
$ 16,000
|
|
Interest expense
|
(3,000)
|
(5,000)
|
(3,000)
|
|
Income before income taxes
|
$ 20,000
|
$ 5,000
|
$ 13,000
|
|
Income tax expense
|
(8,000)
|
(2,000)
|
(5,000)
|
|
Net income
|
$ 12,000
|
$ 3,000
|
$ 8,000
|
Prepare a common-size income statement for each year.
Preparing a Common-Size Balance Sheet
Company A reported the following balance sheet data for the most recent three years:
|
|
Year 3
|
Year 2
|
Year 1
|
|
Cash
|
$ 2,000
|
$ 2,000
|
$ 1,000
|
|
Accounts receivable
|
5,000
|
11,000
|
5,000
|
|
Inventory
|
10,000
|
16,000
|
10,000
|
|
Current assets
|
$17,000
|
$29,000
|
$16,000
|
|
Property, plant, and equipment (net)
|
50,000
|
45,000
|
40,000
|
|
Total assets
|
$67,000
|
$74,000
|
$56,000
|
|
Accounts payable
|
$ 9,000
|
$14,000
|
$ 7,000
|
|
Short-term debt
|
5,000
|
9,000
|
5,000
|
|
Current liabilities
|
$14,000
|
$23,000
|
$12,000
|
|
Long-term debt
|
20,000
|
25,000
|
20,000
|
|
Total liabilities
|
$34,000
|
$48,000
|
$32,000
|
|
Paid-in capital
|
5,000
|
5,000
|
5,000
|
|
Retained earnings
|
28,000
|
21,000
|
19,000
|
|
Total liabilities and equities
|
$67,000
|
$74,000
|
$56,000
|
Prepare the Asset section of a common-size balance sheet for each year.