Go Ad-Free on CAclubindia with Daily Mobile Updates. Subscribe Now!

Dupon chart

shayan khan (accountant) (38 Points)

25 November 2010

Hi,

i need a short notes on Dupon Chart. please make me available the dupon chart notes. its very urgent..

Thanking you!!!

Reply
Follow
Share

4 Replies

Harie (student) (148 Points)
Replied 25 November 2010

I suggest you to refer Padhuka book on C& FM by Saravana Prasath

Upgrade to CAclubindia Pro. Subscribe Now!

shayan khan (accountant) (38 Points)
Replied 25 November 2010

actually i want only dupon chart and therefore i can not buy a book. please help.

suresh kumar (B. Com (hons.) FCA (Future Chartered Accountan) CA Final) (101 Points)
Replied 26 November 2010

DETAIL OF THE MODAL

Financial Analysis and the Changing Role of Credit Professionals

In today's dynamic business environment, it is important for credit professionals to be prepared to apply their skills both within and outside the specific credit management function. Credit executives may be called upon to provide insights regarding issues such as strategic financial planning, measuring the success of a business strategy or determining the viability of an acquisition candidate. Even so, the normal duties involved in credit assessment and management call for the credit manager to be equipped to conduct financial analysis in a rapid and meaningful way.

Financial statement analysis is employed for a variety of reasons. Outside investors are seeking information as to the long run viability of a business and its prospects for providing an adequate return in consideration of the risks being taken. Creditors desire to know whether a potential borrower or customer can service loans being made. Internal analysts and management utilize financial statement analysis as a means to monitor the outcome of policy decisions, predict future performance targets, develop investment strategies, and assess capital needs. As the role of the credit manager is expanded cross-functionally, he or she may be required to answer the call to conduct financial statement analysis under any of these circumstances. The DuPont ratio is a useful tool in providing both an overview and a focus for such analysis.

A comprehensive financial statement analysis will provide insights as to a firm's performance and/or standing in the areas of liquidity, leverage, operating efficiency and profitability. A complete analysis will involve both time series and cross-sectional perspectives. Time series analysis will examine trends using the firm's own performance as a benchmark. Cross sectional analysis will augment the process by using external performance benchmarks for comparison purposes. Every meaningful analysis will begin with a qualitative inquiry as to the strategy and policies of the subject company, creating a context for the investigation. Next, goals and objectives of the analysis will be established, providing a basis for interpreting the results. The DuPont ratio can be used as a compass in this process by directing the analyst toward significant areas of strength and weakness evident in the financial statements.

ROE = (Net Income/Sales) X (Sales/Average Assets) X (Average Assets/Average Equity) (1)

The ratio provides measures in three of the four key areas of analysis, each representing a compass bearing, pointing the way to the next stage of the investigation.

The DuPont Ratio Decomposition

The DuPont ratio is a good place to begin a financial statement analysis because it measures the return on equity (ROE). A for-profit business exists to create wealth for its owner(s). ROE is, therefore, arguably the most important of the key ratios, since it indicates the rate at which owner wealth is increasing. While the DuPont analysis is not an adequate replacement for detailed financial analysis, it provides an excellent snapshot and starting point, as will be seen below.

The three components of the DuPont ratio, as represented in equation (1), cover the areas of profitability, operating efficiency and leverage (liquidity analysis needs to be conducted separately). In the following paragraphs, we examine the meaning of each of these components by calculating and comparing the DuPont ratio using the financial statements and industry standards for Atlantic Aquatic Equipment, Inc. (Exhibits 1, 2, and 3), a retailer of water sporting goods.

Profitability: Net Profit Margin (NPM: Net Income/Sales)

Profitability ratios measure the rate at which either sales or capital is converted into profits at different levels of the operation. The most common are gross, operating and net profitability, which describe performance at different activity levels. Of the three, net profitability is the most comprehensive since it uses the bottom line net income in its measure.

The net profitability for Atlantic Aquatic Equipment in 1996 is:

Net Profit Margin = Net Income/Sales = $70,530/$5,782,000 = 1.22%. (2)

A proper analysis of this ratio would include at least three to five years of trend and cross-sectional comparison data. The cross sectional comparison can be drawn from a variety of sources. Most common are the Dun & Bradstreet Index of Key Flnancial Ratios and the Robert Morris Associates (RMA) Annual Statement Studies. Each of these volumes provide key ratios estimated for business establishments grouped according to industry (i.e., SIC codes). More will be discussed in regard to comparisons as our example is continued below.

Operating Ficiency or Asset U tion: Total Asset Turnover (TAT: Sales/Average Assets)

Turnover or efficiency ratios are important because they indicate how well the assets of a firm are used to generate sales and/or cash. While profitability is important, it doesn't always provide the complete picture of how well a company provides a product or service. A company can be very profitable, but not too efficient. Profitability is based upon accounting measures of sales revenue and costs. Such measures are generated using the matching principle of accounting, which records revenue when earned and expenses when incurred. Hence, the gross profit margin measures the difference between sales revenue and the cost of goods actually sold during the accounting period. The goods sold may be entirely different from the goods produced during that same period. Goods produced but not sold will show up as inventory assets at the end of the year. A firm with abnormally large inventory balances is not performing effectively, and the purpose of efficiency ratios is to reveal that fact