3 DuPont Analysis Playing the Numbers Game Numbers! I need to see numbers!\" exc
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Question
3 DuPont Analysis Playing the Numbers Game Numbers! I need to see numbers!" exclaimed Marcus in response to com- ments made by the assistant vice-president of Finance, Jeff Smith. Marcus Lenovo, president and chief executive officer of Duralex Inc., had been instrumental in significantly increasing the company's size during his first five years in office. 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 Duralex Inc., a medium-sized plastic molding company, was founded in 2008 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. After an initial period of sluggish growth, the firm's revenues and profits had almost quadrupled. Most of the increase had been achieved under Lenovo's lead- ership. The plastics business offered potential for high profit margins, and as a result it attracted many competitors. Despite the fierce competition, Duralex's stock, which traded in the over-the-counter market, had tripled in value over the past five years, making the shareholders very happyExplanation / Answer
Introduction :- DuPont Analysis is an extended examination of Return on Equity (ROE) of a company which analyses Net Profit Margin, Asset Turnover, and Financial Leverage. This analysis was developed by the DuPont Corporation in the year 1920.
In simple words, it breaks down the ROE to analyze how corporate can increase the return for their shareholders.
Formula :-
Return on Equity= Net Profit Margin x Asset Turnover Ratio x Financial Leverage
= (Net Income / Sales) x (Sales / Total Assets) x (Total Assets / Total Equity)
Benefits: The company can increase its Return on Equity if it-
1. Generates a high Net Profit Margin.
2. Effectively uses its assets so as to generate more sales
3. Has a high Financial Leverage
Dupont Analysis Interpretation:-
DuPont Analysis gives a broader view of the Return on Equity of the company. It highlights the company’s strengths and pinpoints the area where there is a scope for improvement. Say if the shareholders are dissatisfied with lower ROE, the company with the help of DuPont Analysis formula can assess whether the lower ROE is due to low-profit margin, low asset turnover or poor leverage.
The DuPont equation can be further decomposed to have an even deeper insight where the net profit margin is broken down into EBIT Margin, Tax Burden, and Interest Burden.
Formula :
Return on Equity= EBIT Margin x Interest Burden x Tax Burden x Asset Turnover Ratio x Financial Leverage
ROE = (EBIT / Sales) x (EBT / EBIT) x (Net Income / EBT) x (Sales / Total Assets) x (Total Assets / Total Equity)
Method to do dupont Analysis:- Apex
Return on Equity =Net Income/Net Sales* Net Sales/Total Assets* Total Assets/Total Equity
(-71.5/82.6) * (82.6/32.8)*(32.8/41.1)= -173.97%
Return on Equity= Profit Margin *Total Asset Turnover*Financial Leverage
-0.87*2.52*0.80= -173.97%
Return on Assets= Profit Margin* Total Asset Turnover
-0.87*2.52=-217.99
Method to do dupont Analysis:- Durflex
Return on Equity =Net Income/Net Sales* Net Sales/Total Assets* Total Assets/Total Equity
(7.3/222.2) * (222.2/265.8)*(265.8/14.5)= 50.34%
Return on Equity= Profit Margin *Total Asset Turnover*Financial Leverage
0.03*0.84*18.33= 50.34%
Return on Assets= Profit Margin* Total Asset Turnover
0.03*0.84= 0.0252
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