Duport Analysis: the Number Game

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DuPont Analysis: Playing The Numbers Game!

The summary of this case is that a newly joined CFO of a company, Plastichem Inc., was able to turn the company’s unfortunate situation around when he first arrived. Yet, five years later, Plastichem has gone through some difficult times including their stock price/ratings severely dropping with no understanding as to why. The case ends with the CFO attempting to figure out what went wrong with the numbers he was given.

To determine the liquidity, we used the quick ratio, current ratio, and interest coverage ratio. From these equations, the higher the ratios meant the better of the company’s financial condition, or more liquidity. The acceptable ratios vary from different industries. In general, company’s quick ratio should be 1 or higher, and its current ratio should be above 1.5 to be considered liquid. In the comparison between two companies’ ratios, 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.

Quick Ratio = (Cash and marketable securities + A/R + Other Current Asset)/ Current Liabilities | Year|
| 2004| 2003| 2002| 2001|
Plastichem| 0.86| 1.141| 1.039| 0.826|
DCM Molding| 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 calculated the debt-equity ratio. Plastichem had a relatively high Debt-Equity Ratio, which indicated that Plastichem was using many debts to finance its growth. High Debt-Equity Ratio also indicated that Plastichem bore more risk because the cost of debt (interest). The company would make more profit if the incremental profit exceeds the incremental cost of debt; however, the company may lose more money/ make less 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 looking at the ratios, Plastichem’s profit has dropped in the past four years. The high leverage may have 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 size balance sheet is a different type of balance sheet that shows each dollar amount in a form of percentage of a common number from the actual balance sheet. Common size balance sheet is useful in comparing companies that have 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|
Sales| 100.00%| 100.00%| 100.00%| 100.00%|
Cost of Sales| 74.81%| 62.76%| 63.39%| 65.04%|
Gross Operating profit| 25.19%| 37.24%| 36.61%| 34.96%| Selling, General & 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%...
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