Duport Analysis: the Number Game

DuPont Analysis Playing The rime Game The summary of this case is that a newly joined chief financial officer of a company, Plastichem Inc. , was able to subprogram the companys unfortunate situation around when he first arrived. Yet, five years later, Plastichem has bygone through some rough times including their stock price/ratings severely sickping with no reasonableness as to why. The case ends with the CFO attempting to figure expose what went wrong with the poetry he was given. To determine the liquidity, we apply the quick ratio, current ratio, and interest coerage ratio.From these equations, the high the ratios meant the better of the companys monetary condition, or more liquidity. The acceptable ratios vary from different industries. In general, companys quick ratio should be 1 or higher, and its current ratio should be above 1. 5 to be considered liquid. In the proportion between two companies ratios, DCM delimitation has shown a better financial condition on average out in the former(prenominal) four years, and Plastichem has barely met the acceptable average or is below the average in the past four years. Quick balance = (Cash and marketable securities + A/R + another(prenominal) Current plus)/ Current Liabilities course 2004 2003 2002 2001 Plastichem 0. 86 1. 141 1. 039 0. 826 DCM Molding 0. 99 0. 93 1. 114 1. 568 grade 2004 2003 2002 2001 Plastichem 1. 301 1. 523 1. 462 1. 309 DCM Molding 1. 632 1. 518 1. 826 2. 095 Year 2004 2003 2002 2001 Plastichem 0. 763 1. 9113 1. 962 2. 442 DCM Molding 4. 667 1. 217 4. 217 8. 6 To cadence the leverage, we calculated the debt- truth ratio. Plastichem had a relatively high Debt- candour Ratio, which indicated that Plastichem was development many debts to finance its growth.High Debt-Equity Ratio also indicated that Plastichem drill hole more risk because the cost of debt (interest). The company would make more scratch if the additive realize exceeds the incremental cost of debt h owever, the company whitethorn lose more money/ make little money if the incremental profit is less than the incremental cost of debt. Year 2004 2003 2002 2001 Plastichem -19. 331 5. 076 4. 862 1. 355 DCM Molding 1. 192 1. 477 1. 274 0. 714 To determine the profitability, we calculate the Profit Margin, ROE, and ROA. By smell at the ratios, Plastichems profit has slumpped in the past four years.The high leverage may draw enlarged the loss of the company. On the other hand, DCM Molding has shown a steady income/profit over the years. Year 2004 2003 2002 2001 Plastichem -24. 14% 0. 68% 3. 45% 5. 65% DCM Molding 5. 91% 6. 19% 5. 37% 5. 09% Year 2004 2003 2002 2001 Plastichem ? 3. 53% 6. 38% 17. 30% DCM Molding 17. 76% 18. 64% 17. 44% 10. 95% Year 2004 2003 2002 2001 Plastichem -26. 90% 0. 58% 1. 09% 7. 34% DCM Molding 8. 10% 7. 53% 7. 66% 6. 39% A common coat balance wheel sheet is a different type of balance sheet that hows each dollar marrow in a form of percentage of a common number from the actual balance sheet. parking lot size balance sheet is useful in comparing companies that have a different collection plate of operations. This type of balance sheet helps in observing at the firms as a common surface and it also helps in comparing the changes in various segments over a period of time. PLASTICHEM INCORPORATED yearbook Income Statements (Value in Millions) 2004 2003 2002 2001 Sales 100. 00% 100. 00% 100. 00% 100. 00% Cost of Sales 74. 81% 62. 76% 63. 39% 65. 04% unadulterated Operating profit 25. 19% 37. 24% 36. 61% 34. 6% Selling, frequent & Admin. Expenses 13. 27% 18. 54% 18. 66% 20. 73% EBITDA 11. 92% 18. 71% 17. 95% 14. 23% Depreciation & amortization 6. 16% 5. 51% 5. 82% 4. 41% EBIT 5. 76% 13. 20% 12. 12% 9. 82% Other Income, network -0. 17% 0. 20% 0. 12% 0. 08% quantity Income returns for Interest Exp. 5. 59% 13. 40% 12. 24% 9. 90% Interest Expense 7. 54% 6. 90% 6. 18% 4. 02% Minority Interest 0. 00% 0. 00% 0. 00% 0. 00% Pre- measure Income -1. 95% 6. 50% 6. 06% 5. 88% Income Taxes 0. 03% 0. 71% 2. 61% 0. 23% Special Income/Charges -22. 15% -5. 10% 0. 00% 0. 00% Net Income from Cont. trading operations -24. 14% 0. 68% 3. 45% 5. 65% Net Income from Discont. Opers. 0. 00% 0. 00% 0. 00% 0. 00% Net Income from Total Operations -24. 14% 0. 68% 3. 45% 5. 65% Normalized Income -1. 99% 5. 78% 3. 49% 5. 65% Extraordinary Income 0. 00% 0. 00% 0. 00% 0. 00% Income from Cum. Eff. of Acct. Chg. 0. 00% 0. 00% 0. 00% 0. 00% Income from Tax Loss Carryforward 0. 00% 0. 00% 0. 00% 0. 00% Other Gains 0. 00% 0. 00% -2. 02% 0. 00% Total Net Income -24. 14% 0. 68% 1. 43% 5. 65% PLASTICHEM INCORPORATED yearly Balance Sheets (Values in millions) 2004 2003 2002 2001ASSETS Current Assets Cash and marketable securities 1. 20% 1. 40% 1. 47% 0. 60% Accounts due 17. 34% 17. 33% 14. 74% 21. 03% Inventory 10. 31% 7. 01% 7. 44% 12. 88% Other Current assets 1. 54% 2. 21% 2. 03% 0. 40% Total Current Assets 3 0. 40% 27. 94% 25. 68% 34. 91% Non-Current Assets Property, Plant & Equipment, Gross 35. 44% 28. 70% 25. 85% 47. 99% Accumulated depreciation & Depletion 14. 41% 9. 13% 8. 15% 19. 42% Property, Plant & Equipment, Net 21. 03% 19. 57% 17. 71% 28. 57% Intangibles 45. 67% 50. 07% 53. 53% 33. 0% Other Non-Current Assets 2. 90% 2. 41% 3. 09% 3. 52% Total Non-Current Assets 69. 60% 72. 06% 74. 32% 65. 09% Total Assets 100. 00% 100. 00% 100. 00% 100. 00% LIABILITIES AND EQUITIES Current Liabilities Accounts payable 7. 71% 6. 92% 6. 03% 9. 76% Short Term Debt 2. 48% 1. 63% 1. 03% 3. 92% Other current Liabilities 13. 17% 9. 80% 10. 50% 12. 98% Total Current liabilities 23. 36% 18. 35% 17. 56% 26. 66% Non-Current liabilities Long-term debt 80. 96% 64. 35% 65. 38% 30. 89% Deferred Income Taxes 0. 00% 0. 00% 0. 00% 0. 0% Other Non-Current Liabilities 1. 13% 0. 84% 0. 00% 0. 00% Minority Interest 0. 00% 0. 00% 0. 00% 0. 00% Total Non-Current Liabilities 82. 09% 65. 19% 65. 38% 30. 89% Total Liabilities 105. 46% 83. 54% 82. 94% 57. 55% Shareholders Equity 0. 00% 0. 00% 0. 00% 0. 00% favorite(a) Stock Equity 0. 00% 0. 00% 0. 00% 0. 00% Common Stock Equity -5. 46% 16. 46% 17. 06% 42. 45% Total equity -5. 46% 16. 46% 17. 06% 42. 45% Total liabilities and Stock Equity 100. 00% 100. 00% 340 100. 00% DCM MOLDING Annual Balance Sheets (Values in millions) 2004 2003 2002 2001 ASSETS Current Assets Cash and marketable securities 0. 33% 1. 25% 0. 47% 8. 06% Accounts receivable 19. 87% 18. 36% 20. 31% 19. 44% Inventory 14. 32% 13. 34% 14. 69% 10. 83% Other Current assets 1. 89% 1. 48% 2. 19% 4. 72% Total Current Assets 36. 40% 34. 44% 37. 66% 43. 06% Non-Current Assets Property, Plant Equipment, Gross 47. 28% 42. 08% 43. 44% 56. 39% Accumulated depreciation Depletion 17. 20% 12. 66% 11. 09% 10. 83% Property, Plant Equipment, Net 30. 08% 29. 42% 32. 34% 45. 56% Intangibles 33. 0% 35. 46% 28. 44% 5. 28% Other Non-Curr ent Assets 0. 22% 0. 68% 1. 56% 6. 11% Total Non-Current Assets 63. 60% 65. 56% 62. 34% 56. 94% Total Assets 100. 00% 100. 00% 100. 00% 100. 00% LIABILITIES AND EQUITIES Current Liabilities Accounts payable 7. 66% 8. 10% 8. 28% 5. 56% Short Term Debt 7. 44% 6. 61% 4. 22% 7. 50% Other current Liabilities 7. 21% 8. 10% 8. 28% 7. 50% Total Current liabilities 22. 31% 22. 69% 20. 63% 20. 56% Non-Current liabilities 0. 00% 0. 00% 0. 00% 0. 00% Long-term debt 28. 63% 31. 93% 29. 22% 15. 00%Deffered Income Taxes 0. 11% 0. 57% 0. 00% 3. 89% Other Non-Current Liabilities 3. 33% 4. 45% 6. 09% 2. 22% Minority Interest 0. 00% 0. 00% 0. 00% 0. 00% Total Non-Current Liabilities 32. 08% 36. 94% 35. 31% 21. 11% Total Liabilities 54. 38% 59. 64% 55. 94% 41. 67% Shareholders Equity 0. 00% 0. 00% 0. 00% 0. 00% Preferred Stock Equity 0. 00% 0. 00% 0. 00% 0. 00% Common Stock Equity 45. 62% 40. 36% 43. 91% 58. 33% Total equity 45. 62% 40. 36% 43. 91% 58. 33% Total liabilities and Stock Equity 100. 00% 100. 00% 100. 00% 100. 00% DCM MOLDING Annual Income Statements (Value in Millions) 2004 2003 2002 2001 Sales 100. 00% 100. 00% 100. 00% 100. 00% Cost of Sales 66. 83% 64. 85% 64. 76% 62. 96% Gross Operating profit 33. 17% 35. 15% 35. 24% 37. 04% Selling, General & Admin. Expenses 17. 23% 18. 65% 19. 60% 22. 22% EBITDA 15. 94% 16. 49% 15. 64% 14. 81% Depreciation & Amortization 4. 61% 4. 40% 4. 32% 4. 86% EBIT 11. 33% 12. 09% 11. 32% 9. 95% Other Income, Net 0. 00% 0. 00% -0. 12% -0. 23% Total Income Avail for Interest Exp. 11. 33% 12. 09% 11. 20% 9. 72% Interest Expense 2. 43% 2. 16% 2. 0% 1. 16% Minority Interest 0. 00% 0. 00% 0. 00% 0. 00% Pre-Tax Income 8. 90% 9. 93% 9. 10% 8. 56% Income Taxes 2. 99% 3. 75% 3. 73% 3. 47% Special Income/Charges 0. 00% 0. 00% 0. 00% 0. 00% Net Income from Cont. Operations 5. 91% 6. 19% 5. 37% 5. 09% Net Income from Discont. Opers. 0. 00% 0. 00% 0. 35% 0. 00% Net Income from Total Operations 5. 91% 6. 19% 5. 72% 5 . 09% Normalized Income 5. 91% 6. 19% 5. 37% 5. 09% Extraordinary Income 0. 00% 0. 00% 0. 00% 0. 00% Income from Cum. Eff of Acct. Chg. 0. 00% 0. 00% 0. 00% 0. 00% Income from Tax Loss Carryforward 0. 0% 0. 00% 0. 00% 0. 00% Other Gains 0. 00% 0. 00% 0. 00% 0. 00% Total Net Income 5. 91% 6. 19% 5. 72% 5. 09% We can see that the cost of the sales has been increasing for both the companies. But, the cost of goods sold for DCM is less that than of Plastichem. This indicates that DCM has been better at controlling their cost so they have a higher gross beach as compare to Plastichem. This reduction in the gross profit has take a stylus to the reduction on the expenses evanesce due to selling the goods, still since DCM has a higher gross profit than Plastichem, they can also slide by more in selling their goods.Plastichem also has more debt compare to DCM, due to which they have a higher interest expenses compare to DCM. A DuPont analysis helps us better understand the changes in r eturn on equity (ROE). DuPont analysis tells us that three things affect ROE operating efficiency, asset use efficiency, and financial leverage. Therefore we break up ROE into its components ROE = Profit Margin (PM) * Total Asset perturbation (TAT) * Equity Multiplier (EM) 2004 Return on Equity Net Profit Margin Total Asset Turnover Equity Multiplier Plastichem 0. 00% -24. 07% 1. 12 0. 00DCM 17. 76% 5. 91% 1. 37 2. 19 2003 Plastichem 3. 53% 0. 68% 0. 85 6. 08 DCM 18. 64% 6. 19% 1. 22 2. 48 2002 Plastichem 6. 38% 1. 47% 0. 74 5. 86 DCM 17. 44% 5. 72% 1. 34 2. 28 2001 Plastichem 17. 30% 5. 65% 1. 30 2. 36 DCM 10. 95% 5. 32% 1. 20 1. 71 If we look at the figures we find that the reduction in ROE for Plastichem is mainly due to the drop in net profit margin. Plastichem increased their use of debt, which resulted in a higher EM, but pitiable PM ensured the fall of ROE.For DCM, on the other hand, we see that it has been fairly constant as san itary as ROE components. Some of the limitations regarding the various financial analyses above are Many companies near the year or quarter end improve the appearance of their figures presenting them in the most attractive way possible. The miss dissimulation of numbers makes the analysis more difficult. The analysis may also be unclear by pompousness as general price levels for goods and services go up and subsequently purchasing power goes down, which makes analogy difficult over time.Many firms also use different accounting methods which make comparing of different companies difficult for instance there are two primary accounting methods used in USA, cash and accumulation accounting. Cash accounting reports income and expenses are reported in the year they are received and paid accrual accounting reports income and expenses in the year they are earned and incurred. Again making it very difficult to go different companies. Some additional information Jay and Jack need in o rder to improve their decision would be to look into the companies accounting practices and see if any off balance sheet items are present.From there they need to make sure the off balance sheet items are converted to in the balance sheet items to have an appropriate comparison. A logical argument of cash flows would also useful in analysis, as it would allow in determining the short-term viability of a company, particularly its ability to pay bills. A statement of cash of cash flows also allows us to view cash and cash equivalents coming in and out of company, giving better understanding as to where money is going and coming from.Also although looking at numbers may allow analysis to quickly spot differences in financials, I believe you must question companies in how they are run and if they are consistently making good business decisions. After collecting, compiling, and analyzing data we have come to conclusion that DCM Molding has shown a better financial condition on average in the past four years, and Plastichem has barely met the acceptable average or is below the average in the past four years. The Plastichem had a relatively high Debt-Equity Ratio, which indicated that was using many debts to finance its growth.The high Debt-Equity Ratio also indicated that Plastichem bore more risk because the cost of debt (interest) making things difficult. The cost of the sales for both the companies have increased. But, the cost of goods sold for DCM is less that than Plastichem. This indicates that DCM has been better at controlling their cost so they have a higher gross margin as compare to Plastichem. This reduction in the gross profit has lead to the reduction on the expenses occur due to selling the goods, but since DCM has a higher gross profit than Plastichem they can also spend more in selling their goods.So in comparison we see that DCM Molding is doing furthermost better with its figures showing much better results than Plastichem. Recommendation that Jack would be justified in making in his report to Andrew would be Plastichem needs to increase profit margin after looking at the figures we find that the decrease in return on equity for Plastichem is mostly due to the drop in net profit margin. Plastichem increased their use of debt that resulted in a higher equity multiplier, but poor profit margin ensured the fall of return on equity.Plastichem had a relatively high Debt-Equity Ratio, which indicated that Plastichem was using many debts to finance its growth. It should be treated as a serious problem being that Plastichems main rival is rated as a strong buy while their stock is rated as a hold. The strong drop in price will create tending for potential and current shareholders. If that fear continues, Plastichems shareholders might sell their stock at a decreasing rate, causing more issues for the company.The CFO should do a comparison between Plastichem and DCMs numbers, and find the strengths and weaknesses amongst his com pany, in particular within its focusing teams. He should also begin finding ways to pay off Plastichems debt as well as not accumulating anymore, being that Plastichem is already seen as risky. The CFO should also find a tighter way to control the companys costs. The analysts are very accurate in their recommendations to the two firms. DCM Molding figures showed far better results and stock should rise While Plastichem might consider selling stocks, if financial performance continues to worsen.