practice on dupont and financial statement analysis

Overview of Financial Statements

a. The DuPont Analysis on EdlerCare is as follows:

a. DuPont Analysis

ElderCare

Industry Avg

Total Margin

Total Asset Turnover

Equity Multiplier

ROE

ElderCare's return on equity is higher than that of the industry average. What the DuPont analysis does is it reveals the sources of that return on equity. In the case of ElderCare, having a higher than average ROE is not necessarily good. The reason is that the single biggest contributor to the ROE for ElderCare is that it is highly-leveraged. It has a much higher equity multiplier than the industry average. It's other metrics are worse. It has a lower margin and a lower asset turnover than the industry average. For a company that is performing well, it would be better to see the asset turnover and the margin higher than the industry average. So for ElderCare the ROE is a bit of a deceptive figure because the company has a lot of debt, and not much equity value relative to the size of the company.

b.

b Ratios

ElderCare

Industry Avg

ROA

Current Ratio

Days cash on hand

22 days

Days in patient accounts

19 days

Debt ratio

Debt to equity ratio

TIE

Fixed Asset Turnover

The financial ratios also highlight that ElderCare is performing poorly relative to its industry peers. As an example, it has a lower return on assets, and lower times interest earned. The lower TIE highlights that this company has a lot more debt than most firms in the industry.

However, the debt ratio is actually lower than most companies, so that points our attention in a different direction. The company would likely have a much higher amount of current liabilities in order to make those numbers work, or pay a higher interest rate than its competitors.

The company has some liquidity issues as well, at least relative to industry averages. It has a lower current ratio – though an acceptable one. It also has a lower number of days cash on hand, which is another liquidity figure. This measure is significantly lower than the industry average, and really represents having less than two weeks' worth of cash on hand. Compounding that issue is the fact that is has six more days patient accounts. Put together, ElderCare's cash conversion cycle is significantly longer than the industry average, and that is a red flag, especially for a company that has a high degree of leverage, which when we look at the debt-to-equity ratio, is much higher than the industry average. Again, this figure highlights that there is far too much in terms of current liabilities compared with other companies in the industry. It is not great that the biggest category is "accrued expenses" – it is living on credit and that does not help the cash conversion problem, but rather it makes it worse.