Question

a. Perform a Du Pont analysis on Green Valley. Assume that the industry average ratios are as follows: Total margin 3.5% Total asset turnover 1.5 Equity multiplier 2.5 Return on equity (ROE) 13.1% b. Calculate and interpret the following ratios: Industry Average Return on assets (ROA) 5.2% Current ratio 2.0 Days cash on hand 22 days Average collection period 19 days Debt ratio 71 % Debt-to-equity ratio 2.5 Times interest earned (TIE) ratio 2.6 Fixed asset turnover ratio 1.4

Answer 1

Answer: A total margin of 3.5 percent indicates that the net income over revenue is 3.5 percent of the revenue. Asset turnover of 1.5 percent suggests that total revenue is 1.5 times the book value of the assets of the company. An equity multiplier of 2.5 suggests that the assets of the company are 2.5 times the equity which means that the company has a capital structure of 60 percent debt and 40 percent equity. A ROE or return on equity of 13.1 percent tells us that the company earns a 13.1 percent return on the money invested in it by the its owners or investors in its equity.

A return on asset ratio is calculated by multiplying the Total margin by the total asset turnover. (1.5*3.5) = 5.25%. This ratio tells us that the net income divided by the book value of assets is 5.25 percent of the book value of assets.

Current ratio is calculated by dividing the current assets of a company by the current liabilities of a company. A current ratio of 2.0 suggests that the company has twice the amount of current assets than its current liabilities.

Days Cash on hand is calculated by dividing a companies unrestricted cash and cash equivalents by the company's daily average cost of operations excluding depreciation. A 22 days cash on hand tells us that the company has unrestricted cash to bear the operational expenses of the company for 22 days.

Average collection period is the average number of days it takes a company to collect payment after making a credit sales. A 19 days period means that the company on average takes 19 days to collect payment after a credit sale has been made.

A debt ratio is the ratio of company's total debt and total assets.It is calculated by dividing the  company's  total debt by its total assets.

A 71 percent debt ratio indicates that the firms out of all the company's assets 71 percent are financed by debt and 29 percent by equity, which is also its capital structure.

Debt to equity ratio of 2.5 indicates that the total debt of a company is 2.5 times the total equity, it indicates that for $1 of equity in the company there is debt of $2.5. It is calculated by dividing total debt by total equity.

Times interest earned is calculated by dividing the net income of a company by its finance costs, or interest payments of the year.

This measures how much more is the company is earning relative to its interest payments. A ratio of 2.6 indicates that the company's net income is 2.6 times its interest expense.

Fixed asset turnover ratio of 1.4 indicates that the company makes 1.4 times the revenue of its fixed assets. IT is calculated by dividing total revenue by average fixed assets.

Explanation: