Question

In: Finance

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

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?

$$ \begin{array}{llll} \text { Johnson } & 2013 & 2014 & 2015 \\ \hline \text { Financial leverage multiplier } & 1.75 & 1.75 & 1.85 \\ \text { Net profit margin } & 0.059 & 0.058 & 0.049 \\ \text { Total asset turnover } & 2.11 & 2.18 & 2.34 \\ \hline \text { Industry averages } & & & \\ \hline \text { Financial leverage multiplier } & 1.67 & 1.69 & 1.64 \\ \text { Net profit margin } & 0.054 & 0.047 & 0.041 \\ \text { Total asset turnover } & 2.05 & 2.13 & 2.15 \end{array} $$

Solutions

Expert Solution

a) DuPont sytem of analysis examines the return on equity (ROE) analyzing profit margin, total asset turnover, and financial leverage

Johnson

2013

ROE = Profit Margin x Total Asset Turnover x Leverage Factor

ROE = 0.059*2.11*1.75

ROE = 0.2179

ROE = 21.79%

2014

ROE = Profit Margin x Total Asset Turnover x Leverage Factor

ROE = 0.058*2.18*1.75

ROE = 0.2213

ROE = 22.13%

2015

ROE = Profit Margin x Total Asset Turnover x Leverage Factor

ROE = 0.049*2.34*1.85

ROE = 0.2121

ROE = 21.21%

Industry Average

2013

ROE = Profit Margin x Total Asset Turnover x Leverage Factor

ROE = 0.054*2.05*1.67

ROE = 0.1849

ROE = 18.49%

2014

ROE = Profit Margin x Total Asset Turnover x Leverage Factor

ROE = 0.047*2.13*1.69

ROE = 0.1692

ROE = 16.92%

2015

ROE = Profit Margin x Total Asset Turnover x Leverage Factor

ROE = 0.041*2.15*1.64

ROE = 0.1446

ROE = 14.46%

b) Johnson has performed better than Industry over the 3 years compared to Industry Individually, it has been decreased from the Year 2014 to 2015.

c) Johnson Requires to increase the Net Profit Margin area where the company performance would increase, leading to an increase in ROE.

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