Using Financial Statements 31- Raising prices perhaps by improving product quality or offering extra
services. Makers of luxury cars have done this successfully by provid-
ing free roadside assistance and loaner cars when customer cars are
being serviced. - Maintaining prices but reducing the quantity of product in the pack-
age. Candy bar manufacturers and other makers of packaged foods
often use this method. - Initiating or increasing charges for ancillary goods or services. For ex-
ample, banks have substantially increased their charges to stop checks
and for checks written with insufficient funds. Distributors of com-
puters and software have instituted fees for providing technical assis-
tance on their help lines and for restocking returned items. - Improving the productivity and efficiency of operations.
- Cutting costs in a variety of ways.
- Asset Turnover may be improved in ways such as:
- Speeding up the collection of accounts receivable.
- Increasing inventory turnover, perhaps by adopting “just in time” in-
ventory methods. - Slowing down payments to suppliers, thus increasing accounts payable.
- Reducing idle capacity of plant and equipment.
- Leverage may be increased, within prudent limits, by means such as:
- Using long-term debt rather than equity to fund additions to plant,
property, and equipment. - Repurchasing previously issued common stock in the open market.
The chief advantage of using the Dupont formula is to focus attention on
specific initiatives that will improve return on equity by means of enhancing
profit margins, increasing asset turnover, or employing greater financial lever-
age within prudent limits.
In addition to the Dupont formula, there is another way to combine fi-
nancial ratios, one that serves another useful purpose—predicting solvency or
bankruptcy for a given enterprise. It uses what is known as the zscore.
THE ZSCORE
Financial ratios are useful not only to assess the past or present condition of
an enterprise, but also to reliably predict its future solvency or bankruptcy.
This type of information is of critical importance to present and potential
creditors and investors. There are several different methods of analysis for
obtaining this predictive information. The best-known and most time-tested
is the zscore, developed for publicly traded manufacturing firms by Professor