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Brief description on how du point analysis is done
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DuPont Analysis
Anatomy of Returns
Total Assets = Total Liabilities + Total Equity
Total amount of
resources used in the
business to make
profits
How much of
that assets are
financed by the
outsiders that
is, debt capital.
How much of
assets are
financed by
proprietor is,
equity capital.
So, when a firm make profits, those profits are a return
to all the assets, some of which is a return to
shareholders’ money invested (equity capital) and
some of which is a return to the outsiders/borrowed
money (debt capital).
Anatomy of Returns – Case 1
Rs.1,000 of Total Assets (all financed by
shareholder) generated Rs.500 of total
revenue, Rs.400 of total expenses. Compute
ROA/ROCE and ROE
100 1000
= ROA = 10%
Since it is all shareholders’ money, ROE = 10%
Anatomy of Returns – Case 2 Rs.1,000 of Total Assets (financed Rs.700 by
Shareholders and Rs.300 @8% borrowed from a bank)
generated Rs.500 of total revenue, Rs.400 of expenses
Rs.700
76 700
=
Rs.300
(Equity Capital)
(Debt capital)
100 1000
=
Total Assets Rs.1000 ROA = 10%
ROE = 10.9%
ROA>i-rate The extra is payment to equity 10% 8% Thus 2% additional to Equity
leveraged someone else’s money to
increase the return to shareholders’ money.
Anatomy of Returns – Case 3 Rs.1,000 of Total Assets (financed Rs.700 by
Shareholders and Rs.300 @15% borrowed
from a bank) generated Rs.500 of total
revenue, Rs.400 of expenses before interest
Rs.700
55 700
=
Rs.300
(Equity Capital)
(Debt capital)
100 1000
=
Total Assets Rs.1000 ROA = 10%
ROE = 7.9%
Making 10% on all assets, but paying 15% on debt portion
(ROROA<i-rate), and the difference must come from equity.
So, How is return generated?
•Through Three Primary Levers
– By being efficient with your operations
– By getting the most out of your assets
– By leveraging your money
Analyzing Financial Performance
•By analyzing each of the three levers that
leads to Return on Equity – ROE:
– Efficiency of operations
– How well assets are working into profits
– Leverage
DuPont System
•Developed in 1919 by a finance executive at E.I. du Pont de Nemours and Co
•“DuPont Financial Analysis Model is a rather
straightforward method for assessing the factors
that influence a firm’s financial performance.”
(Gunderson, Detre, and Boehlje, AgriMarketing
2005)
DuPont System – What is It?
•The system identifies profitability as
being impacted by three different levers:
1. Earnings & efficiency in earnings
2. Ability of your assets to be turned into
profits
3. Financial leverage
Earnings/Profitability
Efficiency Leverage
The DuPont Equation
[Return on Equity (ROE)]
Equity
PATROE
The DuPont Equation
[Return on Equity (ROE)]
Equity
AssetsX
Assets
SalesX
Sales
PATROE
Equity
PATROE
The DuPont Equation
[Return on Equity (ROE)]
XityprofitabilROE
XSales
PATROE
)(
The DuPont Equation
[Return on Equity (ROE)]
XefficiencyXityprofitabilROE
XAssets
SalesX
Sales
PATROE
)()(
The DuPont Equation
[Return on Equity (ROE)]
)()()( leverageXefficiencyXityprofitabilROE
Equity
AssetsX
Assets
SalesX
Sales
PATROE
The DuPont Equation
[Return on Equity (ROE)]
)()()( leverageXefficiencyXityprofitabilROE
Equity
AssetsX
Assets
SalesX
Sales
PATROE
The DuPont Equation
[Return on Equity (ROE)]
)()()( leverageXefficiencyXityprofitabilROE
Equity
PAT
Equity
AssetsX
Assets
SalesX
Sales
PATROE
The DuPont Equation
[Return on Equity (ROE)]
Equity
AssetsX
Assets
SalesX
Sales
PATROE
Equity
PATROE