Duport Analysis: the Number Game

DuPont Analysis Playing The Numbers second The summary of this case is that a newly joined CFO of a company, Plastichem Inc. , was able to turn the companys unfortunate situation to a greater extent or slight when he first arrived. Yet, five years later, Plastichem has gone through many a(prenominal) difficult times including their stock price/ratings severely moultping with no understanding as to why. The case ends with the CFO attempting to figure bulge what went incorrectly with the amount he was given. To determine the liquidity, we used the quick resi ascribable, new ratio, and post c everyplaceage ratio.From these equations, the higher(prenominal) the ratios meant the improve of the companys financial condition, or more(prenominal) liquidity. The acceptable ratios vary from assorted 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 analogy amongst deuce companies ratio s, DCM moulding has shown a better financial condition on intermediate in the past tense four years, and Plastichem has bargonly met the acceptable average out or is below the average in the past four years. dissipated Ratio = ( gold and marketable securities + A/R + opposite occurrent Asset)/ current Liabilities Year 2004 2003 2002 2001 Plastichem 0. 86 1. 141 1. 039 0. 826 DCM mould 0. 99 0. 93 1. 114 1. 568 Year 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 measure the leverage, we guessd the debt-equity ratio. Plastichem had a relatively high Debt- truth Ratio, which indicated that Plastichem was exploitation many debts to finance its growth.High Debt- beauteousness Ratio excessively indicated that Plastichem fag out more risk because the comprise of debt (interest). The company would make more attain if the incremental get ahead exceeds the incremental cost of debt however, the company may dawdle more money/ make less money if the incremental advantage 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 hitability, we calculate the win Margin, hard roe, and ROA. By flavouring at the ratios, Plastichems mesh has mouldped in the past four years.The high leverage may defend all overstated 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 size counterpoise woodworking plane is a various type of balance sheet that hows each dollar amount in a form of percentage of a common number from the developed balance sheet. rough-cut size balance sheet is useful in comparing companies that book a different scale of operations. This type of balance sheet helps in observing at the firms as a common sized and it also helps in comparing the changes in various segments over a period of time. PLASTICHEM INCORPORATED Annual Income Statements (Value in Millions) 2004 2003 2002 2001 gross sales 100. 00% 100. 00% 100. 00% 100. 00% hail of Sales 74. 81% 62. 76% 63. 39% 65. 04% Gross Operating profit 25. 19% 37. 24% 36. 61% 34. 6% Selling, General & Admin. Expenses 13. 27% 18. 54% 18. 66% 20. 73% EBITDA 11. 92% 18. 71% 17. 95% 14. 23% depreciation & amortisation 6. 16% 5. 51% 5. 82% 4. 41% EBIT 5. 76% 13. 20% 12. 12% 9. 82% otherwise Income, meshwork -0. 17% 0. 20% 0. 12% 0. 08% entirety Income Avail for affair Exp. 5. 59% 13. 40% 12. 24% 9. 90% bet Expe nse 7. 54% 6. 90% 6. 18% 4. 02% nonage saki 0. 00% 0. 00% 0. 00% 0. 00% Pre- assess Income -1. 95% 6. 50% 6. 06% 5. 88% Income Taxes 0. 03% 0. 71% 2. 61% 0. 23% extra Income/Charges -22. 15% -5. 10% 0. 00% 0. 00% give the sack Income from Cont.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 join 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(a) Gains 0. 00% 0. 00% -2. 02% 0. 00% come Net Income -24. 14% 0. 68% 1. 43% 5. 65% PLASTICHEM INCORPORATED Annual Balance Sheets (Values in millions) 2004 2003 2002 2001ASSETS reliable Assets Cash and marketable securities 1. 20% 1. 40% 1. 47% 0. 60% Accounts receivable 17. 34% 17. 33% 14. 74% 21. 03% Inventory 10. 31% 7. 01% 7. 44% 12. 88% some other Current assets 1. 54% 2. 21% 2. 03% 0. 40% list Current Assets 30. 40% 27. 94% 25. 68% 34. 91% Non-Current Assets Property, lay & 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 collectible 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% Preferred extend 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-Current 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. Op ers. 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 screwing bump into 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 requireling their cost so they have a higher gross margin as equivalence to Plastichem. This lessening in the gross profit has lead to the reduction on the expenses occur delinquent to selling the goods, but since DCM has a higher gross profit than Plastichem, they can also spend 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 recurrence 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 turnover rate (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 join ond their use of debt, which resulted in a higher EM, but poor PM en sured the bloodline of ROE.For DCM, on the other hand, we see that it has been fairly constant as well as ROE components. Some of the limitations regarding the various financial analyses above are galore(postnominal) companies near the year or quarter end improve the visual aspect of their figures presenting them in the most attractive way possible. The miss misrepresentation of numbers makes the analysis more difficult. The analysis may also be indecipherable by inflation as general price levels for goods and services go up and subsequently purchasing power goes down, which makes comparison difficult over time.Many firms also use different accounting system methods which make comparing of different companies difficult for instance there are two primary accounting methods used in USA, cash and assemblage 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 analyze different companies. Some additional entropy Jay and Jack need in order to improve their finding would be to look into the companies accounting practices and see if any clear up 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 statement of cash flows would also useful in analysis, as it would allow in determining the short-term viability of a company, specially its ability to pay bills. A statement of cash of cash flows also allows us to view cash and cash equivalents approach 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 pronto spot differences in financials, I believe you must research companies in how they are run and if they are consistently making good business concern decisions. Afte r 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 compari son we see that DCM Molding is doing far better with its figures showing much better results than Plastichem. Recommendation that Jack would be confirm in making in his report to Andrew would be Plastichem needs to increase profit margin after looking at the figures we find that the moderate 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 conundrum being that Plastichems main rival is rated as a backbreaking buy while their stock is rated as a hold. The strong drop in price will create fear for potential and current shareholders. If that fear continues, Plastichems shareholders faculty 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 company, in particular within its care 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.