Practice on Dupont and Financial Statement Analysis Essay

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Overview of Financial Statementsa. The DuPont Analysis on EdlerCare is as follows:a. DuPont AnalysisElderCareIndustry AvgTotal Margin1.8%3.5%Total Asset Turnover0.81.5Equity Multiplier7.02.5ROE16.2%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 RatiosElderCareIndustry AvgROA2.31%5.20%Current Ratio1.42Days cash on hand12.522 daysDays in patient accounts24.919 daysDebt ratio68%71%Debt to equity ratio6.02.5TIE0.42.6Fixed Asset Turnover1.71.4The financial ratios also highlight that ElderCare is performing poorly relative to its industry peers. As an example, it has…

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…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.

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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….....

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