Playing the

Numbers Game!
DuPont Analysis

Reporters:
Kevin Camato Hanah Feria
Dorothy Gatoc Jacob Jereza
RG Lucero Janice Tanongtanong
 Background of the Case

"Numbers! I need to see numbers!" exclaimed Andrew in response to comments made by

the assistant vice-president of Finance, Jack Brown. Andrew Sullivan, the President and
Chief Executive Officer of Plastichem Inc., had been instrumental in significantly increasing
the company's size during his first five years in office.
 Background of the Case

He spearheaded some successful marketing campaigns and revamped the production

facilities by adopting the latest technology in injection molding. He also implemented various
cost-cutting measures and introduced performance plans to boost efficiency. Foremen and
supervisors were offered stock option incentives, and bonuses were tied to earnings per share
(EPS) growth.
 Background of the Case

Plastichem Inc., a medium-sized plastic molding company, was founded in 1990 and was
located in Midland, Michigan. The company supplied molded plastic products to various
processing industries as well as end-users. It enjoyed a fairly diversified base of customers
ranging from automobile and home products manufacturers to the federal government.
 Background of the Case
After an initial period of sluggish growth, the firm's revenues and profits had almost
quadrupled. Most of the increase had been achieved under the leadership of Andrew Sullivan.
The plastics business offered potential for high profit margins and as a result it attracted many
competitors. Despite the fierce competition, Plastichem's stock, which traded in the over-the-
counter market, had tripled in value over the past five years making the shareholders very
happy.
 Background of the Case
Recently, however, the stock price had dipped sharply, raising concerns among security
analysts. Jack Brown, the assistant VP of Finance, brought this matter to Andrew's attention
informing him that the analysts had given their closest rival, DCM Molding, a "Strong Buy"
rating while downgrading Plastichem's rating to a "Hold." This recent development had outraged
shareholders and the Personal Relations department had been overwhelmed with calls from
anxious owners wanting to know what was going on.
 Background of the Case
Andrew, a motivated leader, was not about to give up easily, however. His track record
of turning companies around was very good. He knew that if he could identify the main problem
areas, he would be able to make some strategic moves to alleviate the problems. He, therefore,
demanded that he be given a detailed report of the firm's financial condition in comparison to that
of DCM Molding. Andrew had learned over the years that in order to be successful it was
very important to "play the numbers game."
Table 1: Plastichem Balance
Sheet
Plastichem Incorporated
Annual Balanc e Sheet s (Values in millions)
2004 2003 2002 2001
ASSETS
Curre nt Asse ts
C ash and marketable securities 3.2 4.8 5 0.6
Accounts receivable 46.1 59.6 50.1 20.9
Inventory 27.4 24.1 25.3 12.8
Other C urrent assets 4.1 7.6 6.9 0.4
Total C urrent Assets 80.8 96.1 87.3 34.7

Non- Curre nt Asse ts

Property, Plant & Equipment, Gross 94.2 98.7 87.9 47.7
Accumulated depreciation & Depletion 38.3 31.4 27.7 19.3
Property, Plant & Equipment, Net 55.9 67.3 60.2 28.4
Intangibles 121.4 172.2 182 32.8
Other Non-C urrent Assets 7.7 8.3 10.5 3.5
Total Non-C urrent Assets 185 247.8 252.7 64.7
Total Asse ts 265.8 343.9 340 99.4
Table 1: Plastichem Balance
Sheet (cont)
LIABILITIES AND EQUITIES
Curre nt Lia bilitie s
Accounts payable 20.5 23.8 20.5 9.7
Short Term Debt 6.6 5.6 3.5 3.9
Other C urrent Liabilities 35 33.7 35.7 12.9
Total C urrent Liabilities 62.1 63.1 59.7 26.5
Non- Curre nt Lia bilitie s
Long-term debt 215.2 221.3 222.3 30.7
Deferred Income Taxes 0 0 0 0
Other Non-C urrent Liabilities 3 2.9 0 0
Minority Interest 0 0 0 0
Total Non-C urrent Liabilities 218.2 224.2 222.3 30.7
Total Lia bilitie s 280.3 287.3 282 57.2

Sha re holde r's Equity

Preferred Stock Equity 0 0 0 0
C ommon Stock Equity -14.5 56.6 58 42.2
Total equity -14.5 56.6 58 42.2
Total lia bilitie s a nd Stock Equity 265.8 343.9 340 99.4

Total C ommon Shares outstanding 7.7 Mil 7.2 Mil 7.6 Mil 6.6 Mil
referred Shares 0 0 0 0
Treasury Shares 0 0 0 0
Table 2: DCM Balance Sheet
DCM Molding
Annual Balanc e Sheet s (Values in millions)
2004 2003 2002 2001
ASSETS
Curre nt Asse ts

C ash and marketable securities 0.3 1.1 0.3 2.9

Accounts receivable 17.9 16.1 13 7
Inventory 12.9 11.7 9.4 3.9
Other C urrent assets 1.7 1.3 1.4 1.7
Total C urrent Assets 32.8 30.2 24.1 15.5
Non-C urrent Assets
Prope rty , Pla nt & Equipme nt, Gross
Accumulated depreciation &
15.5 11.1 7.1 3.9
Depletion
Property, Plant & Equipment, Net 27.1 25.8 20.7 16.4
Intangibles 30 31.1 18.2 1.9
Other Non-C urrent Assets 0.2 0.6 1 2.2
Total Non-C urrent Assets 57.3 57.5 39.9 20.5
Total Asse ts 90.1 87.7 64 36
Table 2: DCM Balance Sheet
(cont)
LIABILITIES AND EQUITIES
Curre nt Lia bilitie s
Accounts payable 6.9 7.1 5.3 2
Short Term Debt 6.7 5.8 2.7 2.7
Other current Liabilities 6.5 7.1 5.3 2.7
Total C urrent liabilities 20.1 19.9 13.2 7.4

Non- Curre nt lia bilitie s

Long-term debt 25.8 28 18.7 5.4
Deferred Income Taxes 0.1 0.5 0 1.4
Other Non-C urrent Liabilities 3 3.9 3.9 0.8
Minority Interest 0 0 0 0
Total Non-C urrent Liabilities 28.9 32.4 22.6 7.6
Tota l Lia bilitie s 49 52.3 35.8 15

Sha re holde r's Equity

Preferred Stock Equity 0 0 0 0
C ommon Stock Equity 41.1 35.4 28.1 21
Tota l e quity 41.1 35.4 28.1 21
Tota l lia bilitie s a nd Stock
90.1 87.7 64 36
Equity

Total C ommon Shares outstanding 4.3 mil 4.3 mil 4.3 mil 4.1 mil
Preferred Shares 0 0 0 0
Treasury Shares 0 0 0 0
Table 3: Plastichem Income
Statement Plastichem Incorporated
Annual Inc ome St at ement s (Values in millions)
2004 2003 2002 2001
Sales 297 294 252.4 129.3
C ost of Sales 222.2 184.5 160 84.1
Gross Operating profit 74.8 109.5 92.4 45.2
Selling, General & Admin. Expenses 39.4 54.5 47.1 26.8
EBITDA 35.4 55 45.3 18.4
Depreciation & Amortization 18.3 16.2 14.7 5.7
EBIT 17.1 38.8 30.6 12.7
Other Income, Net -0.5 0.6 0.3 0.1
Total Income Avail for Interest Exp. 16.6 39.4 30.9 12.8
Interest Expense 22.4 20.3 15.6 5.2
Minority Interest 0 0 0 0
Pre-Tax Income -5.8 19.1 15.3 7.6
Income Taxes 0.1 2.1 6.6 0.3

Special Income/C harges -65.8 -15 0 0

Net Income from C ont. Operations -71.7 2 8.7 7.3
Net Income from Discont. Opers. 0 0 0 0
Net Income from Total Operations -71.7 2 8.7 7.3

Normalized Income -5.9 17 8.8 7.3

Extraordinary Income 0 0 0 0
Income from C um. Eff. of Acct. C hg. 0 0 0 0
Income from Tax Loss C arryforward 0 0 0 0
Other Gains 0 0 -5.1 0
Tota l Ne t Income - 71.7 2 3.6 7.3
Table 4: DCM Income Statement
DCM Molding
Annual Inc ome St at ement s (Values in millions)
2004 2003 2002 2001
Sales 123.6 106.7 85.7 43.2
C ost of Sales 82.6 69.2 55.5 27.2
Gross Operating profit 41 37.5 30.2 16
Selling, General & Admin. Expenses 21.3 19.9 16.8 9.6
EBITDA 19.7 17.6 13.4 6.4
Depreciation & Amortization 5.7 4.7 3.7 2.1
EBIT 14 12.9 9.7 4.3
Other Income, Net 0 0 -0.1 -0.1
Total Income Avail for Interest Exp. 14 12.9 9.6 4.2
Interest Expense 3 2.3 1.8 0.5
Minority Interest 0 0 0 0
Pre-Tax Income 11 10.6 7.8 3.7
Income Taxes 3.7 4 3.2 1.5

Special Income/C harges 0 0 0 0

Net Income from C ont. Operations 7.3 6.6 4.6 2.2
Net Income from Discont. Opers. 0 0 0.3 0
Net Income from Total Operations 7.3 6.6 4.9 2.2

Normalized Income 7.3 6.6 4.6 2.2

Extraordinary Income 0 0 0 0
Income from C um. Eff of Acct. C hg. 0 0 0 0
Income from Tax Loss C arryforward 0 0 0 0
Other Gains 0 0 0 0
Tota l Ne t Income 7.3 6.6 4.9 2.2
Question 1
Jack Brown realizes that the first thing he must do is compare the liquidity,
leverage, activity, and profitability ratios of the two companies. Using the income
statement and balance sheet data shown in Tables 1-4 prepare a detailed
comparison report indicating the strengths and weaknesses of each company.
Answer 1
PLASTICHEM DCM
2004 2003 2002 2001 2004 2003 2002 2001
Liquidity Ratio
Current Ratio 1.30 1.52 1.46 1.31 1.63 1.52 1.83 2.09
Quick Ratio 0.86 1.14 1.04 0.83 0.99 0.93 1.11 1.57
Cash Ratio 0.05 0.08 0.08 0.02 0.01 0.06 0.02 0.39
Leverage Ratio
Total Debt Ratio 1.05 0.84 0.83 0.58 0.54 0.60 0.56 0.42
Debt-Equity Ratio -19.12 5.02 4.86 1.36 1.12 1.35 1.14 0.61
Equity Multiplier -18.33 6.08 5.86 2.36 2.19 2.48 2.28 1.71
Times Interest Ratio 0.76 1.91 1.96 2.44 4.67 5.61 5.39 8.60
Cash Coverage Ratio 1.58 2.71 2.90 3.54 6.57 7.65 7.44 12.80
Activity Ratio
Inventory Turnover ratio 8.11 7.66 6.32 6.57 6.40 5.91 5.90 6.97
Day's sales in Inventory 45.01 47.68 57.72 55.55 57.00 61.71 61.82 52.33
Receivables Turnover 6.44 4.93 5.04 6.19 6.91 6.63 6.59 6.17
ACP or Days' Sales in Receivables 56.65 73.99 72.45 59.00 52.86 55.07 55.37 59.14
Total Asset Turnover 1.12 0.85 0.74 1.30 1.37 1.22 1.34 1.20
Capital Intensity 0.89 1.17 1.35 0.77 0.73 0.82 0.75 0.83
Profitability Margin
Profit Margin -24.07% 0.68% 1.47% 5.65% 5.91% 6.19% 5.72% 5.32%
ROA -26.90% 0.58% 1.09% 7.34% 8.10% 7.53% 7.66% 6.39%
ROE NMF 3.53% 6.38% 17.30% 17.76% 18.64% 17.44% 10.95%
Question 2
Jay Singh, a recently hired intern, has suggested to Jack that he should include
an analysis of common size statements in the report. Is Jay right? Of what use is
such an analysis? Please prepare common size balance sheets and income statements
for Plastichem and DCM Molding and discuss your findings.
Answer 2
PLASTICHEM DCM
Annual Balance Sheets (Value in Millions)
2004% 2003% 2002% 2001% 2004% 2003% 2002% 2001%
ASSETS
Current Assets
Cash and marketable securities 1.20% 1.40% 1.50% 0.60% 0.33% 1.25% 0.47% 8.06%
Accounts receivable 17.30% 17.30% 14.70% 21.00% 19.87% 18.36% 20.31% 19.44%
Inventory 10.30% 7.00% 7.40% 12.90% 14.32% 13.34% 14.69% 10.83%
Other Current assets 1.50% 2.20% 2.00% 0.40% 1.89% 1.48% 2.19% 4.72%
Total Current Assets 30.40% 27.90% 25.70% 34.90% 36.40% 34.44% 37.66% 43.06%

Non-Current Assets
Property, Plant & Equipment, Gross 35.40% 28.70% 25.90% 48.00% 47.28% 42.08% 43.44% 56.39%
Accumulated depreciation & Depletion 14.40% 9.10% 8.10% 19.40% 17.20% 12.66% 11.09% 10.83%
Property, Plant & Equipment, Net 21.00% 19.60% 17.70% 28.60% 30.08% 29.42% 32.34% 45.56%
Intangibles 45.70% 50.10% 53.50% 33.00% 33.30% 35.46% 28.44% 5.28%
Other Non-Current Assets 2.90% 2.40% 3.10% 3.50% 0.22% 0.68% 1.56% 6.11%
Total Non-Current Assets 69.60% 72.10% 74.30% 65.10% 63.60% 65.56% 62.34% 56.94%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Answer 2
LIABILITIES AND EQUITIES
Current Liabilities
Accounts payable 7.70% 6.90% 6.00% 9.80% 7.66% 8.10% 8.28% 5.56%
Short Term Debt 2.48% 1.60% 1.00% 3.90% 7.44% 6.61% 4.22% 7.50%
Other current Liabilities 13.17% 9.80% 10.50% 13.00% 7.21% 8.10% 8.28% 18.06%
Total Current liabilities 23.40% 18.30% 17.60% 26.70% 22.31% 22.69% 20.63% 20.56%
Non-Current liabilities
Long-term debt 81.00% 64.40% 65.40% 30.90% 28.63% 31.93% 29.22% 15.00%
Deferred Income Taxes 0.00% 0.00% 0.00% 0.00% 0.11% 0.57% 0.00% 3.89%
Other Non-Current Liabilities 1.10% 0.80% 0.00% 0.00% 3.33% 4.45% 6.09% 2.22%
Minority Interest 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Non-Current Liabilities 82.10% 65.20% 65.40% 30.90% 32.08% 36.94% 35.31% 21.11%
Total Liabilities 105.50% 83.50% 82.90% 57.50% 54.38% 59.64% 55.94% 41.67%

Shareholder's Equity
Preferred Stock Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Common Stock Equity -5.50% 16.50% 17.10% 42.50% 45.62% 40.36% 43.91% 58.33%
Total equity -5.50% 16.50% 17.10% 42.50% 45.62% 40.36% 43.91% 58.33%
Total liabilities and Stock Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Answer 2
PLASTICHEM INCORPORATED DCM MOLDING
Annual Income Statements (Value in Millions)
2004% 2003% 2002% 2001% 2004% 2003% 2002% 2001%

Sales 100% 100% 100% 100% 100.00% 100.00% 100.00% 100.00%

Cost of Sales 75% 63% 63% 65% 66.80% 64.90% 64.80% 63.00%
Gross Operating profit 25% 37% 37% 35% 33.20% 35.10% 35.20% 37.00%
Selling, General & Admin. Expenses 13% 19% 19% 21% 17.20% 18.70% 19.60% 22.20%
EBITDA 12% 19% 18% 14% 15.90% 16.50% 15.60% 14.80%
Depreciation & Amortization 6% 6% 6% 4% 4.60% 4.40% 4.30% 4.90%
EBIT 6% 13% 12% 10% 11.30% 12.10% 11.30% 10.00%
Other Income, Net 0% 0% 0% 0% 0.00% 0.00% -0.10% -0.20%
Total Income Avail for Interest Exp. -17% 8% 12% 10% 11.30% 12.10% 11.20% 9.70%
Interest Expense 8% 7% 6% 4% 2.40% 2.20% 2.10% 1.20%
Minority Interest 0% 0% 0% 0% 0.00% 0.00% 0.00% 0.00%
Pre-Tax Income -24% 1% 6% 6% 8.90% 9.90% 9.10% 8.60%
Income Taxes 0% 1% 3% 0% 3.00% 3.70% 3.70% 3.50%

Special Income/Charges -22% -5% 0% 0% 0.00% 0.00% 0.00% 0.00%

Net Income from Cont.Operations -24% 1% 3% 6% 5.90% 6.20% 5.40% 5.30%

Net Income from Discount. Operation 0% 0% 0% 0% 0.00% 0.00% 0.40% 0.00%
Net Income from Total Operations -24% 1% 3% 6% 5.90% 6.20% 5.70% 5.30%
Normalized Income -2% 6% 3% 6% 5.90% 6.20% 5.40% 5.30%
Extraordinary Income 0% 0% 0% 0% 0.00% 0.00% 0.00% 0.00%
Income from Cum. Eff of Acct. Chg. 0% 0% 0% 0% 0.00% 0.00% 0.00% 0.00%
Income from Tax Loss Carryforward 0% 0% 0% 0% 0.00% 0.00% 0.00% 0.00%
Other Gains 0% 0% -2% 0% 0.00% 0.00% 0.00% 0.00%

Total Net Income -24% 1% 1% 6% 5.90% 6.20% 5.70% 5.30%

Question 3
Jay has also recommended that a DuPont analysis be done. How can such an
analysis be performed and what information does it indicate about the relative
performance of the two companies?
Answer 3

Plastichem DCM
2004 2003 2002 2001 2004 2003 2002 2001
Profit Margin -0.2407 0.0068 0.0147 0.0565 0.0591 0.0619 0.0572 0.0532
Total Asset Turnover 1.1174 0.8549 0.7424 1.3008 1.3718 1.2166 1.3391 1.2
Equity Multiplier -18.331 6.076 5.8621 2.3555 2.1922 2.4774 2.2776 1.7143
Return on Asset -26.90% 0.58% 1.09% 7.35% 8.11% 7.53% 7.66% 6.38%
Return on Equity NMF 3.53% 6.40% 17.31% 17.77% 18.66% 17.45% 10.94%
Question 4

What are some of the limitations regarding the various analyses that have
been suggested above? What additional data would Jay and Jack need to
improve their findings? Are there any other calculations and comparisons that
would be helpful? Please explain.
 Answer 4
Limitations:
• Many companies near the year or quarter end improve the appearance of their figures
presenting them in the most attractive way possible.
• Many firms also use different accounting methods which make comparing of different
companies difficult for instance there are two primary accounting methods used in USA,
cash and accrual accounting.
 Answer 4
Additional Data for Improvement:
• look into the companies accounting practices and see if any off balance sheet items are
present
• A statement of cash flows would also useful in analysis, as it would allow in determining
the short-term viability of a company, particularly its ability to pay bills.
Question 5

After collecting, compiling, and analyzing the data, what conclusions and
recommendations would Jack be justified in making in his report to Andrew?
Answer 5
• DCM Molding has shown a better financial condition on average in the past four
years
• Plastichem has barely met the acceptable average or is below the average in the
past four years
• The cost of the sales for both the companies have increased. But, the cost of goods
sold for DCM is less than that of the Plastichem.
Answer 5
• DCM has a higher gross profit than Plastichem
• DCM Molding is doing far better with its figures showing much better results than
Plastichem
• Plastichem needs to increase profit margin after looking at the figures
• Plastichem was using many debts to finance its growth.
Question 6

In your opinion, how acute is the problem facing Plastichem, Inc.? What
strategic moves do you think Andrew could make to alleviate the problems?
Answer 6
Answer 6
• It should be treated as a serious problem.
• The strong drop in price will create fear for potential and current shareholders.
• The CFO should do a SWOT Analysis using the comparison.
• He should also find ways to pay off the company’s debt.
• He should control the company’s cost.
Question 7

How accurate are the analysts in their recommendations of the two firms?
Answer 7
Answer 7
• The analysts’ recommendations are accurate. DCM is performing well than
Plastichem based on the figures.
• The firm’s stocks will be greatly affected.