Nuvo Research Inc Case Solution

You will conduct a DuPont analysis to identify the circumstances affecting the company’s operating performance

DuPont Analysis tells us that the return on equity of a company is affected by three things; operational efficiency measured by the profit margin; assets use efficiency which is measured by total asset turnover, and financial leverage, which is measured by the Equity Multiplier.

Mathematically, the DuPont Analysis can be expressed as follows:

ROE = Profit Margin (Profit / Sales) * Total Asset Turnover (Sales / Assets) * Equity Multiplier (Assets / Equity).

Based on the calculations carried out in the excel sheet, the DuPont Analysis of the company shows that these three ratios give rise to return on the equity value of approximately -85%.

ROE = -0.85 = -2.34 * 0.204 * 1.77.

The operational efficiency of the company signified by the total assets turnover is negative because the company has a huge loss in the financial year 2013. Thus, the operational efficiency of the company remained very poor during the financial year owing to huge net loss. On the other hand, the assets turnover for the company remained around 20%, which is a quite stable figure considering the profitability status of the company. The equity multiplier of the company is also very healthy and hence, the DuPont analysis has identified the poor operational performance of the company to be the reason behind the negative return on the equity value of the company.

You include a discussion and a graph of the financial analysis or comparison of the NUVO share price on the stock exchange index. What are analysts advising investors to do in the market?

The following two graphs show the daily market return data for the market and the NRI Corporation for the last two years. The graph shows that the daily return on the shares of the company was very volatile as compared to the market and this pattern is expected to go on in the future due to the dismal operating performance of the company and the company and the bad reputation in the market. Under these circumstances, analysts are advising the shareholders to hold the stock until the earnings of the company start to normalize.

You will produce proforma financial statements under several scenarios, estimate cash flows, internal growth, and sustainable growth rate.

In the next financial year, the operational performance of the company is expected to show the loss; however, the loss is expected to decrease a little bit due to which stock price will remain stable. The company is expected to continue the historic revenue growth rate of 10.50%; however, due to huge expenses; the company is still expected to remain in loss after a year.

Document and explain the most recent securities issue in the context of NRI’s operating performance and market valuation.

A comparison of the key balance sheet and income statement performance indicators between industry and the company shows that the company is performing far below the other competitors and any security issue at this point in time will fail. The Price to book ratio of 0.55 shows the stock price is less than the book value due to consistent poor operational performance. However, successful launch of products like PENNSAID 2% can boost the sales of the company in the long run, but in the short run, the stock price is expected to remain stable at best.