ratio du pont

8/7/2019 Ratio Du Pont

1/23

Prof Rishi Chourasia

1


2/23

Stock Price

2

Risk ofRisk ofCashflowsCashflows

Timing ofTiming ofCashflowsCashflows

ExpectedExpectedCashflowsCashflows

Stock PriceStock Price

MarketMarketConditionsConditions

NPVNPV

MVAMVA

EVAEVA


3/23

An Example: Dell

Abbreviated Bala

nce Sheet

Assets:

y CurrentAssets: $7,681.00

y Non-CurrentAssets: $3,790.00

y TotalAssets: $11,471.00

Liabilities:

y Current Liabilities: $5,192.00

y LT Debt & Other LT Liab.: $971.00

y Equity: $5,308.00

y Total Liab. and Equity: $11,471.00

3


4/23

An Example: Dell

Abbreviated Income Statement

Sales $25,265.00Costs of Goods Sold -$19,891.00Gross Profit $5,374.00

Cash operating expense -$2,761.00EBITDA 2,613.00Depreciation &Amortization -$156.00Other Income (Net) -$6.00EBIT $2,451.00

Interest -$0.00EBT $2,451.00Income Taxes -$785.00Special Income/Charges -$194.00Net Income (EAT) $1,666.00

4


5/23

Types of Ratios Financial Ratios:

y Liquidity Ratios

Assess ability to cover current obligations

y Leverage Ratios

Assess ability to cover long term debt obligations

Operational Ratios:y Activity (Turnover) Ratios

Assess amount of activity relative to amount of resourcesused

yProfitability Ratios Assess profits relative to amount of resources used

Valuation Ratios: Assess market price relative to assets or earnings

5


6/23

Liquidity Ratio Examples: Dell

Current Ratio:

Quick (Acid Test) Ratio:

6

48.15,192.00$

7,681.00$

sLiabilitieCurrent

setsCurrent As

:RatioCurrent!!!

1.40000,107,1$

00.391$00.681,7$

sLiabilitieCurrent

sInventorie-setsCurrent As

:RatioTestAcid !

!!


7/23

Ratio Comparison: Current Ratio

7

0

0.

1

1.

2

2.

CurrentR

atio

Dell 2.08 1. 1. 1.72 1. 8

Industry 1.80 1.80 1.90 1. 0

Jan-9 Jan-97 Jan-98 Jan-99 Jan-00


8/23

Leverage Ratio Examples: Dell

Debt Ratio:

8

53.73%11,471.00$

6,163.00$

AssetsTotal

sLiabilitieTotal

:RatioDebt !!!


9/23

Ratio Comparison: Debt Ratio

9

0

0.1

0.2

0.

0.

0.

0.

0.

0.8

DebtRa

tio

Dell . 0% .0 % 9. 0% .2 % . %

Industry 2.96% 60.00% 2. 8% 62.96%



10/23

Profitability Ratio Examples:

Dell Return onAssets (ROA):

Return on Equity (ROE):

1

0

%5.4111,471.00$1,666.00$I:O !!!

31.39%5,308.00$

1,666.00$

qu y

I:O !!!


11/23

Profitability Ratio Examples:

Dell Net Profit Margin:

Retention Ratio

1

1

6.59%25,265.00$2,451.00$

SalesEBIT:MarginProfitNet !!!

%00166.0$

0$66.0$Div-:)(RatioRetention !

!!V


12/23

Ratio Comparison: ROE

1

2

0%

10%

20%

0%

0%

0%

60%

70%

80%

ROE

Dell 28.1 % 64.27% 73.01% 62.90% 31.39%

Industry 22.30% 30.60% 2 . 0% 18.00%



13/23

Ratio Comparison: ROA

1

3

0%

%

10%

1 %

20%

2 %

ROA

Dell 12.66% 17.31% 22.12% 21.23% 14. 2%

Industry 6.80% 10.90% 7.20% .70%



14/23

Ratio Comparison: Profit Margin

1

4

0%

1%

2%

3%

4%

%

6%

7%

8%

9%

ProfitMa

rgin

Dell .14% 6.68% 7.66% 8.00% 6. 9%

Industry 3.40% 4.74% 3.79% 2.8 %



15/23

Activity (Turnover) Ratio

Examples: Dell TotalAsset Turnover Ratio:

Inventory Turnover Ratio:

1

5

20211,471.00$25,265.00$

AssetsTotalSales:TurnoverAssetTotal

.

!!

64.62391.00$

25,265.00$

Inventory

Sales:TurnoverInventory !!


16/23

Ratio Comparison:A

sset Turnover

1

6

0%

0%

100%

1 0%

200%

2 0%

300%

350%

AssetTurnover

Dell 2.47 2.59 2.89 2.65 2.20

Industry 2.00 2.30 1.90 2.00



17/23

The DuPont System

Method to breakdown ROE into:y ROA and Equity Multiplier

ROA is further broken down as:y

Profit Margin andA

sset Turnover Helps to identify sources of strength and weakness in

current performance

Helps to focus attention on value drivers

This analysis enables the analyst to understand thesource of superior (or inferior) return by comparisonwith companies in similar industries (or betweenindustries).

17


18/23

The DuPont System

1

8

Profit Margin Total Asset T rnover

R A E it M ltiplier

R E


19/23

The DuPont System

1

9

Pr fit r i t l t r r

it lti li r

EquityCommon

AssetsTotal

AssetsTotal

IncomeNetMultiplierEquityROAROE

v

v


20/23

The DuPont System

2

0


it lti li r

AssetsTotal

Sales

Sales

IncomeNetTurnoverAssetTotalMarginProfitROA

v

v


21/23

The DuPont System

2

1


it lti li r

EquityC

tt l

tt l

l

l

tultipliEquityurnoverAssetot lrginProfitE

vv

vv


22/23

The DuPont System: Dell

22

MultiplierEquityROA

MultiplierEquityTurnoverAssetTotalMarginProfit

EquityCommon

AssetsTotal

AssetsTotal

Sales

Sales

IncomeNetROE

v

vv

vv

31.39%

2.16111452.0

2.16112.20250.0659 $5,308.00

$11,471.00

$11,471.00

$25,265.00

$25,265.00

$1,666.00ROE

v

vv

vv


23/23

Where Net profit = net profit after taxes

Equity = shareholders' equity

EBIT = Earnings before interest and taxes

Sales = Net sales

This decomposition presents various ratios used in fundamental analysis.

The company's tax burden is (Net profit Pretax profit). This is the proportion of the company'sprofits retained after paying income taxes.

The company's interest burden is (Pretax profit EBIT). This will be 1.00 for a firm with no debt

or financial leverage.

The company's operating profit margin orreturn on sales (ROS) is (EBIT Sales). This is the

operating profit per dollar of sales.

The company's asset turnover(ATO) is (Sales Assets). The company's leverage ratio is (Assets Equity), which is equal to the firm's debt to equity ratio

+ 1. This is a measure of financial leverage.

The company's return on assets (ROA) is (Return on sales xAsset turnover).

The company's compound leverage factoris (Interest burden x Leverage).

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