Illustrated Solution: Problem 21-33 Chapter 21 Illustrated Solution: Problem 21-33 DuPont Analysis of Three Companies

Problem Introduction Company A Company B Company C Net sales $ 60,000 $ 28,000 $ 21,000 Net income 9,600 1,850 360 Total assets 155,400 21,500 3,200 Total equity 61,000 11,300 1,690

Ratios Problem Information Return on sales Asset turnover Assets-to-equity ratio Return on assets Return on equity

Ratio Computations Company A Company B Company C Return on Sales = Net income / Net sales Company A Company B Company C $9,600 $60,000 $1,850 $28,000 $360 $21,000 = 16.00% = 6.61% = 1.71%

Ratio Computations Company A Company B Company C Asset turnover = Net sales / Total assets Company A Company B Company C $60,000 $155,400 $28,000 $21,500 $21,000 $3,200 = 0.39 = 1.30 = 6.56

Ratio Computations Company A Company B Company C Asset-to-equity ratio = Total assets/Total equity Company A Company B Company C $155,400 $61,000 $21,500 $11,300 $3,200 $1,690 = 2.55 = 1.90 = 1.89

Ratio Computations Company A Company B Company C Return on assets = Net income / Total assets, or = Return on sales x Asset turnover Company A Company B Company C $9,600 $155,400 $1,850 $21,500 $360 $3,200 = 6.18% = 8.60% = 11.25%

Ratio Computations Company A Company B Company C Return on equity = Net income / Total equity Company A Company B Company C $9,600 $61,000 $1,850 $11,300 $360 $1,690 =15.74% = 16.37% = 21.30%

Ratio Summary Table Ratio Company A Company B Company C Return on sales 16.00% 6.61% 1.71% Asset turnover 0.39 1.30 6.56 Assets-to-equity ratio 2.55 1.90 1.89 Return on assets 6.18% 8.60% 11.25% Return on equity 15.74% 16.37% 21.30%

Ratio Analysis Ratio Company A Company B Company C Return on sales 16.00% 6.61% 1.71% Asset turnover 0.39 1.30 6.56 Assets-to-equity ratio 2.55 1.90 1.89 Return on assets 6.18% 8.60% 11.25% Return on equity 15.74% 16.37% 21.30% The large utility is Company A. (The large investment in assets, the low asset turnover, and high return on sales suggest Company A is the utility.) The low return on sales and a high asset turnover suggest Company C is the large grocery story. Therefore, the large department store is Company B.

End of Problem