a. Using and its industry averages, how well run would you say Hatfield’s data Hatfield appears to be in comparison with other firms in its industry? What are its primary strengths and weaknesses? Be specific in your answer, and point to various ratios that support your position. Also, use the Du Pont equation (see Chapter 3) as one part of your analysis. The Du Pont equation shows the relationship among asset management, profitability Answer: ratios, and leverage. By examining this equation we can determine where Hatfield falls short of the industry. ROEHatfield = Profit margin × Asset turnover × Equity multiplier = 3.30% × 1.67 × 1.94 = 10.6%. ROEIndustry = Profit margin × Asset turnover × Equity multiplier = 4.99% × 2.04 × 1.56 = 16.1 From the Du Pont equation, you can see that profitability and asset Hatfield’s management ratios are lower than the industry average and its leverage is higher than the industry average. The combined effect results in a much lower return on equity for the firm relative to the industry average. If you study the asset management ratios in detail, you will see that the receivables and industry turnovers are lower than the firm’s industry average. Sales are too low for the current assets held, the firm may be holding receivables that are uncollectible, or the firm may be holding inventory that is obsolete. The debt ratio is higher than the industry average. A direct result of this is a firm’s higher interest rate, which increases the interest expense. As a result, the firm’s firm’s times interest earned ratio is lower than the industry average.
a. Using Hatfield’s data and its industry averages, how well run would you say Hatfield appears to be in comparison with other firms in its industry? What are its primary strengths and weaknesses? Be specific in your answer, and point to various ratios that support your position. Also, use the Du Pont equation (see Chapter 3) as one part of your analysis. Answer: The Du Pont equation shows the relationship among asset management, profitability ratios, and leverage. By examining this equation we can determine where Hatfield falls short of the industry. ROEHatfield = Profit margin × Asset turnover × Equity multiplier = 3.30% × 1.67 × 1.94 = 10.6%. ROEIndustry = Profit margin × Asset turnover × Equity multiplier = 4.99% × 2.04 × 1.56 = 16.1 From the Du Pont equation, you can see that Hatfield’s profitability and asset management ratios are lower than the industry average and its leverage is higher than the industry average. The combined effect results in a much lower return on equity for the firm relative to the industry average. If you study the asset management ratios in detail, you will see that the firm’s receivables and industry turnovers are lower than the industry average. Sales are too low for the current assets held, the firm may be holding receivables that are uncollectible, or the firm may be holding inventory that is obsolete. The firm’s debt ratio is higher than the industry average. A direct result of this is a higher interest rate, which increases the firm’s interest expense. As a result, the firm’s times interest earned ratio is lower than the industry average.