Question

conduct a DuPont analysis of the attached income statement

End 0 Ctri Ins 1999 1,995,941 1,116,659 879,282 1998 1,993,914 55.9% 1,175,830 44.1% 818,084 Net Operating Revenues Cost Of Goods Sold 59.0% 41.0 % Gross Margin Operating Expenses (Incom (Personnel, R&D, Depreciations and other operating expenses) Operating Profits Other Incomes (Expenses) Financial Exp (Income) Pretax Income 29.3% 561,435 317,847 11,659 -39,483 28.1% 583,500 15.9% 234,584 0.6% 11.8% -0.2% 4,603 2.0 % - 10,074 14.5% 219,907 68,157 -0.5 % 11.0% 290,023 95,908 194,115 3.4% 4.8% Income Tax 9.7 % 151,750 7.6% Net Income 2,655,790 2,685,658 61.9% 1,902,304 16.0 % 700,696 12.9% 347,749 32.9% 853,859 38.1% 783,354 Asset Current Assets Cash+ Investments 70.8% 1,643,042 425,679 343,851 873,512 26.1% 12.9% 31.8% 29.2% Inventories Other Current Assets Non Current Assets 1,012,748 501,733 18.9% 401,190 14.9% Prop Plant & Equip Net 511,015 19.2% 382,164 14.2% Other Assets 2,655,790 925,318 529,206 2,685,658 34.8% 922,734 19.9% 485,478 Liabilities Current Liabilities 34.4% 18.1% Accounts Payable (Short Term) Debts (Short Term) Other Short Term Liabilities Non Current Liabilities 14,9% 437,256 16.3% 0.0% 22.8% 608,895 20.4% 543,410 396,112 0 0.0% 22.7% 0 606,408 20.2% 542,006 64,402 1,124.064 327,436 629,038 167,590 Debts (Long Term) Other Long Term Liabilities 65,485 42.3% 1,154,029 2.4% 2.4% 43.0 % 27.5% Equity Common Stock & Surplus Retained Earnings Other Equity 29.1% 317,311 56.0 % 684,217 14.9% 152,501 59.3% 13.2% 1009

Answer 1

DuPont Analysis decomposes different drivers of return on equity(RoE) into 3 major drivers -

1) operating efficiency - which is measure by net profit margin. Formula of Net profit margin = net income/ total revenues

2) Asset efficiency - which is measured by asset turnover ratio = Formula of asset turnover ratio= revenues/ average total assets

average total assets are calculated by taking (assets in year 1998 + assets in year 1999)/2

3) Leverage - which is measured by equity multiplier, calculated as average assets/average equity
average equity is calculated as (equity in 1998+ equity in 1999)/2

Now , DuPont analysis = Net profit margin * asset turnover ratio* equity multiplier

We'll take respective values from the given income statement and put them in formulae

1) Net profit margin = 194,115/1995941 = 0.097 or 9.7%...............................(1)

2) Asset turnover ratio = 1995941/average total assets)
average total assets = (2685658+2655790)/2 =2,670,724
therefore, asset turnover ratio = 1995941/2670724= 0.747 ............. (2)

3) Leverage

average total equity = (1154029+1124064)/2 = 1,139,046.5
Therefore, leverage = equity multiplier= 2670724/1139046.5 = 2.344...............(3)

Hence, DuPont Analysis = (1)*(2)*(3)
i.e 9.7%*0.747*2.344 = 16.984%

Or The Return on Equity is 16.984%