Andrews DuPont Essay examples

Submitted By 11oamu
Words: 407
Pages: 2

A DuPont Analysis is used to gain an understanding of how successful a company is at generating a profit with its shareholder’s resources. The model deconstructs Return on Equity into three financial ratios: Return on Sales, Asset Turnover and Financial Structure Leverage. Multiplying Return on Sales and Asset Turnover equals Return on Assets, which is then multiplied by the Financial Structure Leverage ratio to calculate Return on Equity. Analyzing each separate piece measures operating efficiency, asset use efficiency and financial leverage. Management has used this equation to isolate an operating deficiency; Andrews is having difficulties generating a positive net income because of its low contribution margin. At the end 2018, the company reported a net loss of $7.4 million on $195.2 million worth of sales. This translates into a Return on Sales of -3.79% and a Return on Equity of -23.19%. Despite the negative return, sales numbers were considered competitive because they were the second highest in the industry and $15.2 million above Digby, which is the closest competitor. The problem is that variable costs of $145.5 million created a contribution margin of only 25.5%, while Digby’s variable costs of $123.2 million created a contribution margin of 31.6%. As a result, the competitor reported a Return on Sales of 1.96% and a Return on Equity of 6.11%. Management concluded that Digby’s higher contribution margin was obtained through efforts in TQM Initiatives. Digby previously made a $9 million investment in 6 TQM initiatives to reduce variable costs by 11.2%. At the end of the year, Andrews decided to make the same $9 million investment. During 2019, the company experienced an 11.2% decrease in