DuPont equation provides a broader picture of the return the company is earning on its equity. It tells where a company 's strength lies and where there is a room for improvement DuPont analysis examines the return on equity (ROE) analysing profit margin, total asset turnover, and financial leverage. DuPont analysis decomposing ROE into its components allows analyst to identify adverse impact on ROE and predict the future trends. Return on equity (ROE) measure the rate of return flowing to shareholder. The higher the ROE the, the better it is. It concludes that a company can earn a high return on equity if it earns a high net profit margin, it uses its assets effectively to generate more sales; and/or it has a high financial leverage.
Formula of DuPont analysis
Return on Equity = Net Profit Margin × Asset Turnover × Financial Leverage
(net income )/(equity ) = (net income )/(revenue ) x (revenue )/(total asset ) x (total asset)/(equity )
Formula of Extended DuPont Analysis
Return on equity = tax burden x interest burden x EBIT Margin x asset turnover x leverage
(net income )/(equity ) = (net income )/EBT x EBT/EBIT x EBIT/Revenue x (revenue )/(total asset ) x (total asset)/(equity )
Part 2: Calculate and perform a DuPont Analysis based on the company’s latest annual audited reports.
Formula Year 2014
RM’000 Year 2013
Return on asset (ROA) =
(net income)/(total asset )
Net profit margin =
(net income)/(revenue )
Asset management efficiency – Asset Turnover =
... middle of paper ...
... or the more profitable business in year 2014 as compared to year 2013.
Higher earnings per share in year 2014 means that means the company is more profitable and the company has more profits to distribute to its shareholders and has greater growth prospect in year 2014 as compared to year 2013.
Higher ROE in year 2014 means higher net income is generated for each ringgit is common equity invested in year 2014 as compared to year 2013.Higher the ROE in year 2014 means that the company has more rate of return flowing to shareholder as the company has higher return on asset, net profit margin, asset turnover, leverage, tax burden ration, interest burden ration, EBIT margin and earning per share. Breaking down ROE using the DuPont Analysis will let you see deeper into the number and identify which component of the business is really doing well.
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