Numerical Problem - Speech or Presentation Example

NUMERICAL PROBLEM Du Pont analysis is a financial ratio that is based on the return on equity ratio. It analyses the ability of a firm to increase its return on equity by analyzing total asset turnover, profit margin and financial leverage. Return on Equity= profit margin x Total Asset Turnover x financial leverage factorROE= 3.8%x2.1x302= 25.5%2. Ratio Formula Calculation Return on assets (ROA)Net income/total assets1218/9869= 12.3%Current ratioCurrent assets/current liabilities3945/3456= 1.

14Days cash on handCash/ ([operating expense - depreciation expense]/365). 2737/(27395-367-385)/365= 37.50days= 38daysAverage collection period (365*net premiums receivables)/premiums earned(821*365/26682=11.daysDebt ratio Total liabilities/total assets7751/9869)100= 78.54%Debt-to-equity ratioTotal liabilities/ shareholder’s equity7751/2118= 3.66=3.7Times Interest Earned (TIE) ratioEBIT/interest expense (28613-27010)385=4.2Fixed asset turnover ratioNet sales/total fixed assets28613/5924=4.8Debt ratio and debt-to-equity ratio measures the solvency of the firm.

It assesses the portion of the firm’s assets financed through debt. The firm has a higher value of debt ratio (79%) compared to the industry average. This is very unfavorable for the company because greater portion of the firm’s assets are claimed by creditors implying a higher risk in operations because the firm would find it hard to acquire loans for new projects. Further, the firm has a higher debt-to-equity ratio which is also unfavorable indicating more risk because the firm depends more on external lenders.

Average collection period indicates the number of days a firm requires converting its receivables into cash. The firm takes more days that the industry average implying that the premiums receivable of the firm are less liquid or are converted less quickly into cash. The firm is, therefore, less efficient in managing its premium receivables compared to the industry average.Days cash on hand shows the number of days of operating expenses that the firm could meet with its current cash available. The company is in a worse situation because it has a lower ratio than the industry average and should increase its fundraising or cut back its spending.

The firm’s current ratio is lower than that of the industry average. The company can meet its current obligations, but it is less liquid compared to the industry average.Return on assets is a profitability ratio measuring how efficient a firm is in using its assets to generate revenue. The firm has a higher ratio than the industry average implying that it is more efficient in using its assets to generate revenue than the industry average.The firm has higher TIE ratio than the industry average.

It, therefore, has higher ability to meet its interest payments on the debt. The firm has a lower fixed asset turnover ratio meaning it is not using the assets optimally. It is less efficient than the industry average in using assets to generate sales or revenue.References Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory and practice. Mason, Ohio: South-Western.