Solutions to Financial Ratio Analysis Problems

  1. Du Pont

    1. Calculate the following ratios for DuPont for 1997 and 1996:

      1. current ratio

        1997: current ratio = $11,874/$14,070 = 0.8439 times
        1996: current ratio = $11,103/$10,987 = 1.0106 times
      2. inventory turnover

        1997: inventory turnover = $26,377/$4,070 = 6.4808 times
        1996: inventory turnover = $25,144/$3,706 = 6.7847 times

      3. total asset turnover

        1997: total asset turnover = $46,653/$42,942 = 1.0864 times
        1996: total asset turnover = $45,150/$37,870 = 1.1922 times

      4. operating profit margin

        Note: operating profit is not provided directly on the income statement, but must be calculated.
        1997: operating profit margin = $13,607/$46,653 = 0.2917 or 29.17%
        1996: operating profit margin = $13,093/$45,150 = 0.2900 or 29%

      5. net profit margin

        1997: net profit margin = $2,405/$46,653 = 0.0516 or 5.16%
        1996: net profit margin = $3,636/$45,150 = 0.0805 or 8.05%

      6. debt to equity

        1997: debt to equity = $31,002 / $11,270 = 2.7508
        1996: debt to equity = $26,657 / $10,593 = 2.5165

    2. Evaluate the change in the return on assets from 1996 to 1997 for DuPont using the DuPont system.

      1997: return on assets = $2,405 / $42,942 = 0.0560 or 5.60%
      1996: return on assets = $3,636 / $37,870 = 0.0960 or 9.60%
      The return on assets declined from 1996 to 1997. This decline is attributed to both a decline in profitability (as evidenced by the decrease in the net profit margin from 8.05% to 5.16%) and the decline in efficiency (as evidenced by the decrease in the total asset turnover from 1.1922 to 1.0864 times)
  2. Intel, 1998

    1. Calculate the following ratios for Intel for 1998:

      1. Fixed asset turnover
        fixed asset turnover = $26,273 / $11,609 = 2.2632
      2. Operating profit margin
        operating profit margin = $8,379 / $26,273 = 31.892%
      3. Basic earning power
        basic earning power = $8,379 / $31,471 = 26.625%

    2. Has Intel's interest coverage ratio improved from 1996? Explain.
      interest coverage, 1996 = $7,553 / $25 = 302.12 times

      interest coverage, 1997 = $9,887 / $27 = 366.19 times

      interest coverage, 1998 = $8,379 / $34 = 246.44 times

      The actual coverage ratio decreased slightly from 1996 to 1998, but this ratio is not very meaningful in the context of evaluating Intel because Intel uses so little debt in its capital structure (e.g., the ratio of debt to equity is less than 7% in 1998).