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duPont System For Financial Analysis - Gaapifrs

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					Financial Statement Analysis 
 - DuPont & Pyramid Ratios
     Dr. Clive Vlieland-Boddy




                                1
2
         Pyramid Formulas
• These take a basic formula and expand it.
• They enable a basic formula to be 
  decomposed.
• The most common one is “DuPont”




                                              3
    So, How Is Money Made?
Through Three Primary Levers
• By being efficient with your operations
• By getting the most out of your assets
• By leveraging your money
     • that is, helping your own money do bigger and 
       better things through borrowed use of someone 
       else’s money.




                                                        4
How Can I Analyze How I am Doing 
       At Making Money? 
 How I might make more money?
• By analyzing each of the three levers that 
  leads to Return on Equity – ROE:
  – Profitability of the operations
  – How efficient assets are being made to work
  – Leverage ( the right mix of Equity to Debt)


                                                  5
   How Can Return On Equity Be 
           Expanded?

• The basic Formula says the return that the 
  shareholders are getting.

    The Return on Equity (ROE)
• Based on Net Earnings before dividends 
  compared to the average shareholder funds.


                                                6
Introducing the DuPont System for 
        Financial Analysis




                                 7
            DuPont System
• Developed in 1919 by a finance executive 
  at E.I. du Pont de Nemours and Co
• A way of visualizing the information so that 
  everyone can see it
• Is a good tool for getting people started in 
  understanding how they can have an 
  impact on results
• It is simple and straightforward

                                              8
        The DuPont System
• Method to breakdown ROE into:
  – ROA and Equity Multiplier
• ROA is further broken down as:
  – Profit Margin (profitability)
  – Asset Turnover (efficiency in using the assets)
• Helps to identify sources of strength and 
  weakness in current performance
• Helps to focus attention on value drivers
                                                  9
      DuPont System – What is It?
•   The system identifies profitability as being 
    impacted by three different levers:

•   Earnings & efficiency in earnings Earnings
•   Ability of your assets to be turned into profits   Efficiency

•   Financial leverage Leverage




                                                           10
      Return on Equity - ROE
• This represents the Net income generated 
  by the Equity invested in the business
• The Formula is:

  –            Net Income        
                   Equity
  – This represents $’s of profit per $ invested by 
     the shareholders.

                                                   11
            Basic Equation!
                A
• Equals     
         =
                B


                    Expand…….



                                12
   Back to basic Mathematics
• A simple equation:



         A             Y       Z
                x          x

         Y             Z       B



                                   13
        Back to basic Maths
• A simple equation:



         A             Y       Z
                x          x

         Y             Z       B



                                   14
         Back to basic Maths
                A
• Equals     
         =
                B




                               15
                       Net            Total 
                      Profit         Asset               Debt 
       
  ROE
                                                         Ratio
                      Margin        Turnover
Net Income            Net Income      Sales            Total Assets
                =               X                  X
Total Equity           Sales        Total Assets        Total Equity


                                Asset Usage
               Profitability    Efficiency             Leverage




                                                                  16
 So what does the DuPont say?
DuPont analysis tells us that ROE is affected 
 by three things: 

- Operating efficiency, which is measured by profit 
  margin.
- Asset use efficiency, which is measured by total 
  asset turnover.
- Financial leverage is measured by the equity 
  multiplier



                                                  17
18
The DuPont System




                    19
The DuPont System




                    20
The DuPont System




                    21
The DuPont System




                    22
DuPont Equation




                  23
                 DuPont System
             Earnings/Profitability
              Operating
             Profit Margin
                                       Return On
  Income               X       =      Assets (less
  Stream                              interest adj.)
               Asset
              Turnover                                     Return On
                                                  X    =
                                                            Equity
             Asset Efficiency Usage




              Financial
Investment
              Structure
  Stream
              Leverage
                                                                  24
             DuPont System Ratios
              Profitability
               Operating
              Profit Margin
                                  Return On
 Income                 X     =   Assets (less
 Stream                           interest adj.)
                Asset
               Turnover                                Return On
                                               X   =
                                                        Equity
               Efficiency




               Financial
Investment
               Structure
  Stream
               Leverage
                                                              25
   Lets do the Numbers!

Using Whitbread Plc 2009 and 2008 accounts




                                         26
    Whitbread Plc Key Figures

Sales                                1,334.6
Net Earnings                            90.3

Average Total Assets                  2,495.0
Average Total Equity                 1,222.5



                                                27
           DuPont System
Profitability                       We can firstly 
 Operating
Profit Margin
                                    Expand ROA
                        Return On
           X    =      Assets ROA

   Asset
  Turnover                              Return On
                                X   =
                                         Equity
Efficiency/Asset Use




  Financial
  Structure
  Leverage
                                                    28
    Whitbread Plc Key Figures

Sales                                1,334.6
Net Earnings                            90.3

Average Total Assets                  2,495.0
Average Total Equity                 1,222.5



                                                29
Return On Assets
                        Net Income (Profits)                        £90.3m 
ROA =                                              =
                           Total Assets
                                                                  £2,495m
                  Can be expanded to:
Net Profit Margin - Profitability         Asset Turnover Ratio - Efficiency
 Net Income (Profit)                       Total Revenue/Sales
Total Revenue/Sales                            Total Assets



        =            £90.3m                    £1,334.6m
                  £1,334.6m                      £2,495m
If you delete the Total Revenues you return to ROA
                                                                              30
    Whitbread Plc Key Figures

Sales                                1,334.6
Net Earnings                            90.3

Average Total Assets                  2,495.0
Average Total Equity                 1,222.5



                                                31
          DuPont System
    Profitability                            Now we 
 Operating
Profit Margin
                                             can look at 
                    =
                         Return On
                        Assets (less
                                             the effect of 
          X
                        interest adj.)       leverage
    Asset
 Turnover                                      Return On
                                    X    =
Efficiency/Asset Use                            Equity




 Financial
 Structure
 Leverage
                                                           32
    Whitbread Plc Key Figures

Sales                                1,334.6
Net Earnings                            90.3

Average Total Assets                  2,495.0
Average Total Equity                 1,222.5



                                                33
 Return On Equity
                                                                  £90.3m 
                 Net Income (Profits)
 ROROE =                                    =
                     Total Equity                              £1,222.5m



Return On Assets                                Leverage Ratio
          Net Income (Profits)                  Total Assets
ROA =                                           Total Equity
                  Total Assets



                 £90.3m                              £2,495m 
=                                       X
              £2,495m                                   £1,222.5m
If you delete the Total Assets you return to ROE                            34
    Whitbread Plc Key Figures

Sales                                1,334.6
Net Earnings                            90.3

Average Total Assets                  2,495.0
Average Total Equity                 1,222.5



                                                35
Leverage is the mix of debt
versus equity capital used in       Return On
                                     Assets
                                                    OK
making profits.

- Do we have too much debt?
- Do we have enough debt?
- Is our debt capital generating                    Return On
                                        X       =
  profits?                                           Equity
- Can our debt capital be put to
  better use?                                       Too Low


           Total Assets
Leverage                  Too Low
           Total Equity                                    36
Example of DuPont




                    37
Compare Whitbread a UK brewery 
      against its industry




                              38
 Combination of all three factors
                            Whitbread         The 
               Industry
• Profitability         6.77%             8.10% 
• Efficiency             .535                 .74 
• Leverage            2.04%             2.00% 

• Whitbread: 6.77% x .535 x 2.04% = 7.39%
• Industry:     8.10% x .74 x 2.00% = 11.99

                                                     39
Disaggregating Return on 
        Assets
Bye for now!      I’m ready for
                some leisure time.




             Please ensure you
          Prepare for next session

				
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