An overview of financial statements

Overview of Financial Statements

a. The DuPont Analysis on EdlerCare is as follows:

a. DuPont Analysis

ElderCare

Industry Avg

Total Margin

1.8%

3.5%

Total Asset Turnover

0.8

1.5

Equity Multiplier

7.0

2.5

ROE

16.2%

13.1%

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

2.31%

5.20%

Current Ratio

1.4

2

Days cash on hand

12.5

22 days

Days in patient accounts

24.9

19 days

Debt ratio

68%

71%

Debt to equity ratio

6.0

2.5

TIE

0.4

2.6

Fixed Asset Turnover

1.7

1.4

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.