Question

DuPont system of analysis Use the following ratio information for Johnson International and the industry averages for​ Johnson's line of business​ to:

a. Construct the DuPont system of analysis for both Johnson and the industry.
b. Evaluate Johnson​ (and the​ industry) over the​ 3-year period.
c. Indicate in which areas Johnson requires further analysis.​ Why?


Johnson 2013 2014 2015

Financial Leverage Multiplier 1.75 1.75 1.85
Net Profit Margin 0.059 0.058 0.049
Total Asset turnover 2.11 2.18 2.34

Industry Averages

Financial Leverage Multiplier 1.67 1.69 1.64
Net Profit Margin 0.054 0.047 0.041
Total Asset turnover 2.05 2.13 2.15

Answer 1

Answer:

a) DuPont analysis for Johnson International

2013: 0.059 x 2.11 x 1.75 = 0.2179 = 21.79%

2014: 0.058 x 2.18 x 1.75 = 0.2213 = 22.13%

2015: 0.049 x 2.34 x 1.85 = 0.2121 = 21.21%

b) DuPont analysis for industry averages

2013: 0.054 x 2.05 x 1.67 = 0.2121 = 21.21%

2014: 0.047 x 2.13 x 1.69 = 0.1692 = 16.92%

2015: 0.041 x 2.15 x 1.64 = 0.1446 = 14.46%

c) Johnson International's drivers follow the same tendency as the industry's average, e.g. net profit margin decreased in a similar manner, and total asset turnover increased also in a similar manner to the industry's average. The only driver that doesn't follow the industry's trend is financial leverage. While other companies in the same industry decreased their financial leverage, Johnson increased it. You should further analyze why this happened and what are the potential consequences.

Explanation:

The DuPont analysis is used to break down ROE into 3 different components and that way you can analyze whether a company's high ROE comes along with a high risk. The following formula is used to calculate ROE based on 3 different factors:

R OE = net pro fit margin x total assets turnover x financial leverage

Answer 2

Following are the solution to the given points:

For point a:

The DuPont system of analysis investigates the rate of return (ROE) by examining profit margin, total assets, or financial leverage.

Calculating the value from Johnson:

Using formula:

$\to \text{ROE = Profit Margin} \times \text{Total Asset Turnover} \times \text{Leverage Factor}$

Calculating the value for the year 2013:

$= 0.059\times 2.11\times 1.75\\\\= 0.2179\\\\= 21.79\%$

Calculating the value for the year 2014:

$= 0.058 \times 2.18 \times 1.75\\\\= 0.2213\\\\= 22.13\%$

Calculating the value for the year 2015:

$= 0.049\times 2.34 \times 1.85\\\\= 0.2121\\\\= 21.21\%$

Calculating the value for the Industry Average

Using formula:

$\to \text{ROE = Profit Margin} \times \text{Total Asset Turnover} \times \text{Leverage Factor}$

Calculating the value for the year 2013:

$= 0.054\times 2.05 \times 1.67\\\\= 0.1849\\\\= 18.49\%$

Calculating the value for the year 2014:

$= 0.047\times 2.13 \times 1.69\\\\= 0.1692\\\\= 16.92\%$

Calculating the value for the year 2015:

$= 0.041 \times 2.15 \times 1.64\\\\= 0.1446\\\\= 14.46\%$

For point b:

Johnson had performed much better than the industry during the last three years, but it has fallen from 2014 to 2015.

For point c:

Johnson, It also is necessary to enhance Net Profit Margin in areas where the employee management would improve, resulting in a rise in ROE.

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