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Case 3 Essay

4515 words - 19 pages

Case 3: DuPont Analysis: Playing the Numbers Game!

“Numbers! I need to see numbers!” exclaimed Andrew in response to comments made by the assistant vice-president of Finance, Jack Brown. Andrew Sullivan, the President and Chief Executive Officer of Plastichem Inc., had been instrumental in significantly increasing the company's size during his first five years in office. He spearheaded some successful marketing campaigns and revamped the production facilities by adopting the latest technology in injection molding. He also implemented various cost-cutting measures and introduced performance plans to boost efficiency. Foremen and supervisors were offered stock option incentives, and bonuses ...view middle of the document...

Andrew, a motivated leader, was not about to give up easily, however. His track record of turning companies around was very good. He knew that if he could identify the main problem areas, he would be able to make some strategic moves to alleviate the problems. He, therefore, demanded that he be given a detailed report of the firm's financial condition in comparison to that of DCM Molding. Andrew had learned over the years that in order to be successful it was very important to “play the numbers game.”
Questions:
1. Jack Brown realizes that the first thing he must do is compare the liquidity, leverage, activity, and profitability ratios of the two companies. Using the income statement and balance sheet data shown in Tables 1–4 prepare a detailed comparison report indicating the strengths and weaknesses of each company.

Plastichem - Ratio Analysis DCM Ratio Analysis
2004 2003 2002 2001 2004 2003 2002 2001
Current Ratio 1.30 1.52 1.46 1.31 1.63 1.52 1.83 2.09
Quick Ratio 0.86 1.14 1.04 0.83 0.99 0.93 1.11 1.57
Cash Ratio 0.05 0.08 0.08 0.02 0.01 0.06 0.02 0.39
Total Debt Ratio 1.05 0.84 0.83 0.58 0.54 0.60 0.56 0.42
Debt-Equity Ratio -19.12 5.02 4.86 1.36 1.12 1.35 1.14 0.61
Equity Multiplier -18.33 6.08 5.86 2.36 2.19 2.48 2.28 1.71
Times Interest Ratio 0.76 1.91 1.96 2.44 4.67 5.61 5.39 8.60
Cash Coverage Ratio 1.58 2.71 2.90 3.54 6.57 7.65 7.44 12.80
Inventory Turnover ratio 8.11 7.66 6.32 6.57 6.40 5.91 5.90 6.97
Day's sales in Inventory 45.01 47.68 57.72 55.55 57.00 61.71 61.82 52.33
Receivables Turnover 6.44 4.93 5.04 6.19 6.91 6.63 6.59 6.17
ACP or Days' Sales in Receivables 56.65 73.99 72.45 59.00 52.86 55.07 55.37 59.14
Total Asset Turnover 1.12 0.85 0.74 1.30 1.37 1.22 1.34 1.20
Capital Intensity 0.89 1.17 1.35 0.77 0.73 0.82 0.75 0.83
Profit Margin -24.07% 0.68% 1.47% 5.65% 5.91% 6.19% 5.72% 5.32%
ROA -26.90% 0.58% 1.09% 7.34% 8.10% 7.53% 7.66% 6.39%
ROE NMF 3.53% 6.38% 17.30% 17.76% 18.64% 17.44% 10.95%
The liquidity of the two companies can be assesses through the current ratio and quick ratio. If we look at the current ratio, it has been falling for both the companies, but DCM molding is higher than Plastichem. The quick ratio for DCM is also higher than Plastichem as of 2001. This indicates that DCM has a better short term liquidity situation then Plastichem. The current ratio for both is above 1, indicating more current assets as compared to current liabilities, the ratio is falling and so the liquidity is decreasing but DCM is better.

For leverage ratios we use the Total debt Ratio and the times interest ratio. Total debt ratio gives the proportion of debt financing in total financing and times interest ratio indicates the cushion that a firm has in meeting interest payments. For Plastichem, the total debt ratio is increasing indicating that more debt is being used as compared to equity and in 2001, the ratio is above 1 since the total equity is negative. As the level of debt has gone up, the...

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