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    Assignment # 2 Student Zaeem Asif Reg # L1F17BSAF0062 Financial Analysis Submitted To Abid Noor Section B

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    Waleed Khalid
    This document discusses DuPont analysis, a method for analyzing a company's return on equity (ROE). It breaks down ROE into three key components: net profit margin, asset turnover, and financial leverage. The document provides formulas to calculate each component and ROE. It also discusses how analysts can use DuPont analysis to identify a company's strengths and weaknesses, and compares operational efficiency between firms. Drawbacks include potential inaccuracies in financial data and difficulty comparing companies across industries.

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    Assignment # 2 Student Zaeem Asif Reg # L1F17BSAF0062 Financial Analysis Submitted To Abid Noor Section B

    Uploaded by

    Waleed Khalid
    61 views4 pages
    This document discusses DuPont analysis, a method for analyzing a company's return on equity (ROE). It breaks down ROE into three key components: net profit margin, asset turnover, and financial leverage. The document provides formulas to calculate each component and ROE. It also discusses how analysts can use DuPont analysis to identify a company's strengths and weaknesses, and compares operational efficiency between firms. Drawbacks include potential inaccuracies in financial data and difficulty comparing companies across industries.

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    This document discusses DuPont analysis, a method for analyzing a company's return on equity (ROE). It breaks down ROE into three key components: net profit margin, asset turnover, and financial leverage. The document provides formulas to calculate each component and ROE. It also discusses how analysts can use DuPont analysis to identify a company's strengths and weaknesses, and compares operational efficiency between firms. Drawbacks include potential inaccuracies in financial data and difficulty comparing companies across industries.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    61 views4 pages

    Assignment # 2 Student Zaeem Asif Reg # L1F17BSAF0062 Financial Analysis Submitted To Abid Noor Section B

    Uploaded by

    Waleed Khalid
    This document discusses DuPont analysis, a method for analyzing a company's return on equity (ROE). It breaks down ROE into three key components: net profit margin, asset turnover, and financial leverage. The document provides formulas to calculate each component and ROE. It also discusses how analysts can use DuPont analysis to identify a company's strengths and weaknesses, and compares operational efficiency between firms. Drawbacks include potential inaccuracies in financial data and difficulty comparing companies across industries.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Assignment # 2

    Student Zaeem Asif


    Reg # L1F17BSAF0062
    Financial Analysis
    Submitted to
    ABID NOOR
    Section B

    DU PONT ANALYSIS
    Du Pont Analysis
     Started by du Pont corporation in 1920
     Tool to examine company return on equity (ROE). The decomposition of ROE allows
    investors to focus on the key factor of financial performance individually to identify
    strengths and weaknesses.
     Used to analysis a company ability to increase its return on equity
     DuPont analysis breaks ROE into its components to determine which of these
    factors are most responsible for changes in ROE.
     Focus on three major components
    i) Profit margin (Operating efficiency is represented by net profit margin)
    ii) Asset turnover (Asset use efficiency is measured by the asset turnover)
    iii) Financial leverage (Leverage is measured by the equity multiplier)

    I. Net Profit Margin:


    The net profit margin is equal to how much net income or profit is generated as a
    percentage of revenue. net profit margin is typically expressed as a percentage.

    Net Profit Margin= Net profit after taxes / net sales * 100


    Net profit margin help investors assess if a company management is generating
    enough profit from sale
    II. Asset Turnover or assets efficiency
    The asset turnover ratio or assets turn is financial ratio that measures how
    efficiently a company uses its assets to generate revenue.

    Asset Turnover = Net sale /Total assets


    A normal asset turnover ratio will vary from one industry group to another.
    III. Financial Leverage
    Financial leverage, or the equity multiplier, is an analysis of a company's use of
    debt to finance its assets.

    Equity multiplier= Total Assets/Shareholder Equity


    Increase financial leverage will also lead to an increase in return on equity.
    Formula of DuPont Analysis

    Basic Du Pont
    ROI and Du Pont Approach
    Return on investment =return on assets =Earning power
    ROI=ROA=Earning power
    ROI=net profit margin x Total asset turnover
    = (Net profit after taxes / net sales*100) x (Net sale /Total assets)
    = (Net profit after taxes/total assets) *100
    This ratio tells us the earning power on shareholders book value investment and is
    frequently used in comparing two or more firm is in industry

    Extended Du Pont Analysis


    ROE = Return on Shareholder equity
    ROE= net profit margin x Total asset turnover x Equity Multiple
    = (Net profit after taxes / net sales) x (Net sale /Total assets) x (Total Assets /
    Shareholder Equity)
    = (Net profit after taxes/Shareholders equity) *100
    Stakeholder point on analysis
     Business analysts can use the Du Pont method to analyse an organization and
    establish what the company strengths and weaknesses are and how they can
    improve in an efficient way. A DuPont analysis is used to evaluate the component
    parts of a company's return on equity (ROE). This allows an investor to determine
    what financial activities are contributing the most to the changes in ROE. An investor
    can use analysis like this to compare the operational efficiency of two similar firms.
     certain types of high turnover industries, such as retail stores, may have very low
    profit margins on sales and relatively low financial leverage. In industries such as
    these, the measure of asset turnover is much more important.
     Dupont ROE helps shareholders how the company is creating value for shareholder
    and many knowledgeable investors see return on equity as a strong measure of how
    well a company management is creating wealth for shareholders

    Drawbacks
     Du Pont analysis utilizes data from a company income statement and balances
    sheet some of which may not be entirely accurate. even if the data used of
    calculation are reliable.

     Another disadvantage is inherent to all financial ratio analysis method comparing


    companies work best when two companies have sane size and operate in same
    industry

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