DuPont Analysis and Recommendations for MarineMax - Assignment Example

DuPont Analysis and Recommendations For MarineMax, Inc. Prepared for: Michael McLamb, Executive VP, CFO, Secretary Prepared by: [Insert Prepared on: [Insert date] Introduction DuPont Method is a performance measuring method that measures the return on equity breaking down it in three components. DuPont Corporation initially developed the method in the 1920s. Using this method “assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). In DuPont analysis, return on equity is broken down into three parts, which affect the value of the company’s ROE: 1. Operating Efficiency is measured with the help of Profit Margin 2. Asset use efficiency is measured with the help of Asset turnover 3. Financial Leverage is measured with help of equity multiplier Formula of DuPont analysis could be written as: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity) (Robinson, Henry, & Pirie, 2012). Return on Equity HZO’s return on equity of 4.89% is below the industry average of 14.58%. It indicated that HZO had low return on the equity as compared to the ROE of the industry. The ROA of the company indicated poor asset management of the company where it required consideration to be given to the inventory and debt management. HZO is, however, performing well in leverage with only 1.70%, as can be seen in table 1 below (Annual Report: MarineMax Inc., 2014) WMAR is the least preferred stock from the investor’s viewpoint due to the lowest return on equity of just 0.13%. The firm’s ROE is affected due to its low profit margin of 0.06%. The high operating expenses of the company have suppressed profits of the company that have eventually casted a negative impact on its ROE. The company needs to have strict control measures in this area. Equity multiplier is the weakest indicator of WMAR with the lowest in industry at 1.32% as can be seen in the table 1. As seen in the table below, HOG is performing best in terms of operating efficiency with the highest profit margin of 15.18%, which is the main element contributing towards its high return on equity of 27.43%. HOG is, however, required to give attention to its asset management, specifically to managing its receivables, which are overall affecting the company’s performance and returns and causing them to be below than expected (Annual Report: Harley Davidson Inc., 2014). KMX is also performing average in terms of the profit margin and currently, it is the best in asset management among its competitors, which makes its returns attractive at 16.20% as shown in the table 1. Improvement is required in the leverage position of the company as it is relying heavily on debt financing. Table 1: Components of Return on Equity – 2014 PARTICULARS HZO WMAR HOG KMX AVERAGE YEAR - END ROE 4.89% 0.13% 27.43% 16.20% 14.58% OPERATING EFFICIENCY NET PROFIT MARGIN 1.80% 0.06% 15.18% 3.96% 6.40% ASSET MANAGEMENT TOTAL ASSET TURNOVER 1.59% 1.67% 0.64% 1.15% 1.15% FINANCIAL LEVERAGE EQUITY MULTIPLIER (TIMES) 1.70% 1.32% 3.16% 3.57% 2.68% Annual Report: Carmax Inc. (2012); Annual Report: Carmax Inc. (2013); Annual Report: Carmax Inc. (2014); Annual Report: Harley Davidson Inc. (2012); Annual Report: Harley Davidson Inc. (2013); Annual Report: Harley Davidson Inc. (2014); Annual Report: MarineMax Inc. (2012); Annual Report: MarineMax Inc. (2013); Annual Report: MarineMax Inc. (2014); Annual Report: West Marine Inc. (2012); Annual Report: West Marine Inc. (2013); Annual Report: West Marine Inc. (2014). Figure 1: Changes in ROE 2012-2014 Operating Efficiency HZO’s net profit margin is 1.80%, which is below the group average of 6.40%. The difference between gross profit margin of 25.90% and operating margin of 2.46% reveals that the company had a high percentage of operating expenses i.e. 23.44% of sales. High operating expenses may also be associated with the inventory problems and increasing irrecoverable debts of the company. West Marine Inc. is having the lowest net profit margin in the group i.e. 0.06%. Although the gross profit margin of the company is 29.30%, its high selling and admin expenses of 28.83% caused its operating margin to remain below the industry average. Net income per employee of WMAR is only 105.21 indicating the high salary and wages expenses. The financials of the company reveal high expenses also resulted in heavy effective tax rate for the company, which is 85.18%. Inventory level of 54.23% indicated that high admin expenses are also incurred due to slow moving stock or poor inventory management of WMAR (Annual Report: West Marine Inc, 2014). WMAR is recommended to adopt cost control measures to decrease its operating expenses. Harley Davidson is enjoying the highest profit margin of 15.18%, above the industry average of 6.40%. Good inventory management and lower selling and admin expenses are resulting in the higher operating margin for the HOG (Annual Report: Harley Davidson Inc., 2014). Net income per employee of 132,116 shows the efficiency and effectiveness of the company labor, which was subsequently affecting the company’s profits positively. KMX had net profit margin of 3.96% and gross profit margin of 12.95%, which implies that the cost of goods sold is the problem area for the company eating up 87.05% of the company’s total revenue. KMX should seek discounts from suppliers and investigate the market for lower price merchandise so it may cover its cost of goods sold (Annual Report: Carmax Inc, 2014). Asset Management HZO’s receivable turnover is 39.10 that was below the industry average of 98.75. It implies that the credit policy of the company is not good and the credit department is not working efficiently. It may lead to risks of having more bad debts. Inventory turnover was also at 1.96, which was also below industry average. In 2014, HZO’s inventory was 60.63% of current assets, which resulted in large amount of cash of the company stuck in stocks. The quick ratio of HZO was reported 0.29. Based on the ratio, it could be stated that the company’s liquidity position was weak. Inventory turnover was indicative of slow moving or obsolete stock or due to the reason that the company’s products were not attractive to the consumer market (Annual Report: Harley Davidson Inc., 2014). Continuous high stocks in the last four years shows that company was not having any appropriate purchasing policies and stocks took the large portion of the operating margin. HZO must have a strong credit policy to reduce bad debts and increase receivable turnover, which also affected the liquidity position of the company. Although receivable turnover of WMAR, 81.29, was below the average, it performed well within the industry (Annual Report: West Marine Inc, 2014). PPE also had efficiency turnover rate above the industry average. Inventory is the main problem area responsible for poor asset management of WMAR. The company’s inventory turnover ratio is 2.15 and stock took 170 days to sell. In 2014, the inventory constituted 54.23% of the company’s assets that blocked the company’s cash and resulting in its quick ratio to be below than average. WMAR should reassess the inventory position and placement of its products in the market that might be the reason for the slow moving stock. Change in sale locations and good credit policies could result in better asset management for the company (Annual Report: West Marine Inc, 2014). HOG had an alarming situation in the case of its receivables. Receivable turnover ratio of 2.81 in contrast to the average value of 98.75 posed a serious threat of irrecoverable debts to the company. The current ratio of the company was 1.77 which was also below the average and indicative of the fact that receivables turnover were significantly affecting the liquidity of the company (Walton, 2000). Payable turnover of 10.77 was also not suitable as it may lead to poor relationships with suppliers. Fixed asset turnover of HOG was 1.11, which implied that the company did not utilize its fixed assets efficiently in the production process. The overall situation of HOG was indicative of over–trading which if not resolved on timely basis, could result in serious cash flow problems for the company. It is highly recommended that HOG should make a strong credit policy and recovery department in order to avoid irrecoverable expenses. KMX proved to be the best in asset management in the group of four companies. Receivable turnover ratio of 212.15 was strongest in the group and almost twice the average (Annual Report: Carmax Inc, 2014). Inventory turnover was also 7.57 that showed signs of good inventory management. However, the fixed assets turnover of the company required attention, which was at 1.46 and well below the average. Altogether, KMX was managing its assets well but it requires special consideration in managing its fixed assets and payables efficiently. Financial Leverage HZO had an equity multiplier of 1.70, which was below the average value of 2.68. It was indicative of the fact that company was not dependent on debt financing and financing costs of the company were low. However, HZO was significantly below the average values of times interest and cash coverage ratio, 3.82 and 5.63 respectively, which may create solvency problems for the company. It could also make suppliers reluctant to supply to the company with low interest earned ratio and it could result in poor relationship with suppliers. HZO shall reconsider the liquidity position and manage its cash flows appropriately in order to increase cash coverage and interest earned. WMAR also performed well in terms of its equity multiplier that was 1.32 times, but the value remained below the average value of 2.68. The interest cost of the company was low due to lower equity multiplier and the company relied more on financing by its equity shareholder rather than debt financing (Lee, Lee, & Lee, 2009). Cash coverage ratio of 42, which was below the average value, could be considered efficient. However, WMAR is required to give attention to the interest earned ratio, which was 7.26. Low interest earned ratio poses threats of credit risk for the company (Annual Report: West Marine Inc, 2014). HOG and KMX had equity multiplier higher than the average value at 3.16 and 3.57 respectively, which means they relied heavily on debt financing. Total long-term debts of the HOG were 35.64%, which was causing the equity multiplier to be high. Cash coverage and interest earned ratios of HOG were significantly above the average values and the companies could be considered to perform well in this respect. KMX is recommended to strengthen its liquidity position and check for the cash stuck in unused or obsolete fixed assets and inventories to increase its cash coverage ratio. Final Recommendations After analyzing different ratios and performing the DuPont analysis, it is recommended that Marine Max Inc. should specifically give attention to its operating expenses and the policies related to credit management and inventory management. These are areas, which are reducing the firm’s net profit and making it incapable of managing its asset efficiently. Overall, impact of these policies is upsetting return on equity and making it perform below the industry average of 4.89%. References Annual Report: Carmax Inc. (2014). Richmond: Carmax Inc. http://investors.carmax.com/Financial-Reports/default.aspx Annual Report: Carmax Inc. (2013). Richmond: Carmax Inc. http://investors.carmax.com/Financial-Reports/default.aspx Annual Report: Carmax Inc. (2012). Richmond: : Carmax Inc. http://investors.carmax.com/Financial-Reports/default.aspx Annual Report: Harley Davidson Inc. (2014). Milwaukee: Harley Davidson Inc. http://investor.harley-davidson.com/phoenix.zhtml?c=87981&p=irol-reportsannual Annual Report: Harley Davidson Inc. (2013). Milwaukee: Harley Davidson Inc. http://investor.harley-davidson.com/phoenix.zhtml?c=87981&p=irol-reportsannual Annual Report: Harley Davidson Inc. (2012). Milwaukee: Harley Davidson Inc. http://investor.harley-davidson.com/phoenix.zhtml?c=87981&p=irol-reportsannual Annual Report: MarineMax Inc. (2014). Clearwater: MarineMax Inc. http://www.marinemax.com/investor-relations.aspx Annual Report: MarineMax Inc. (2013). Clearwater: MarineMax Inc. http://www.marinemax.com/investor-relations.aspx Annual Report: MarineMax Inc. (2012). Clearwater: MarineMax Inc. http://www.marinemax.com/investor-relations.aspx Annual Report: West Marine Inc. (2014). Watsonville: West Marine Inc. http://phx.corporate-ir.net/phoenix.zhtml?c=61950&p=irol-sec Annual Report: West Marine Inc. (2013). Watsonville: West Marine Inc. http://phx.corporate-ir.net/phoenix.zhtml?c=61950&p=irol-sec Annual Report: West Marine Inc. (2012). Watsonville: West Marine Inc. http://phx.corporate-ir.net/phoenix.zhtml?c=61950&p=irol-sec Lee, A. C., Lee, J. C., & Lee, C. F. (2009). Financial Analysis, Planning and Forecasting: Theory and Application. London: World Scientific. https://books.google.com.pk/books?id=HDqDKtq6rjEC&pg=PR3&dq=Financial+Analysis,+Planning+and+Forecasting:+Theory+and+Application.+London:+World+Scientific.&hl=en&sa=X&ei=M4AWVdb0MMXvaIOPgaAH&ved=0CC0Q6AEwAA#v=onepage&q=Financial%20Analysis%2C%20Planning%20and%20Forecasting%3A%20Theory%20and%20Application.%20London%3A%20World%20Scientific.&f=false Robinson, T., Henry, E., & Pirie, W. L. (2012). International Financial Statement Analysis (2 ed.). New York: John Wiley and Sons. https://books.google.com.pk/books?id=6fGaDWOUyBUC&printsec=frontcover&dq=%29.+International+Financial+Statement+Analysis+%28&hl=en&sa=X&ei=CH8WVei4FYfnaqKMgPAO&ved=0CBoQ6AEwAA#v=onepage&q=).%20International%20Financial%20Statement%20Analysis%20(&f=false Walton, P. (2000). Financial Statement Analysis: An International Perspective. Mason: Cengage Learning EMEA https://books.google.com.pk/books?id=3vq2wQJEauAC&printsec=copyright&source=gbs_pub_info_r#v=onepage&q&f=false Read More