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How to calculate DuPont's analysis ?


Example: A furniture manufacturing company total revenue in 2017 is Rs. 55, 65, 000 and in 2018 Rs. 75, 70, 000. The gross profit of 2017 is Rs. 6, 45, 900 and Rs. 3, 58, 000. The total operating income in 2017 is Rs. 1, 79, 860 and in 2018 is Rs. 88, 640. The total shareholder’s equity is Rs. 8, 00,500. The total asset of a company is Rs. 4, 30,000 and in 2018 is Rs. 5, 00, 000. Find out the return on equity of 2017 year.

Solution: Return on equity (ROE) of 2017 year = total assets / shareholders equity
= 4, 30, 000 / 8, 00, 500
= 0.53 or 53.71%
Return on equity (ROE) of 2018 year = total assets / shareholders equity
= 5, 00, 000 / 8, 00, 500
= 0.62 or 62.47%

Example: There are 2 companies Company PQR and ABC Company. The company PQR is manufacturing soaps and Company ABC deodorant. The market share of both the company is equal.  The revenue of Company PQR is Rs. 15, 26, 000 and Rs. 18, 23, 000 of company ABC. The debenture of company ABC is Rs. 6, 00, 000 and shareholders equity is Rs. 3, 20, 000. Company PQR has Rs. 2, 20, 000 Debenture and Rs. 1, 00, 000 Preference Share capitals and Rs. 4, 00,000 Share capitals. An investor wants to know which company has more ability to increase his profit or improve his earnings level with the help of DuPont’s analysis. Other information is given below:

Particulars
Company PQR Amount (in Rs.)
Company ABC Amount (in Rs.)
Gross profit
3, 80, 000
2, 70, 000
Total operating expenses
45, 000
62, 000
Interest on debenture
6%
6.2%
Tax
30%
30%
Total assets
3, 90,600
2, 85, 000

Solution:
Particulars
Company PQR Amount (in Rs.)
Company ABC Amount (in Rs.)
Gross profit
3,80, 000
2, 70, 000
Less: total operating expenses
45, 000
62, 000
Earnings before interest and tax
3, 35, 000
2, 08, 000
Less: Interest on debenture
36, 000
13, 640
Earnings before tax
2, 99, 000
1, 94, 360
Less: Tax
89, 700
58, 308
Net income
2, 09, 300
1, 36, 052
Total assets
30, 90,600
32, 85, 000


Company PQR:
Net Profit Margin = (Net income / Total revenue) * 100
= (2, 09, 300 / 10, 26, 000)* 100
= 13.7%
Total assets turnover = total revenue / total assets
= 10, 26, 000 / 15, 45, 300
= 0.66 or 66.39%
Financial leverage = total assets / Shareholders equity
= 15, 45, 300 / 4, 00, 000
= 3.86
Return on equity = net profit margin*asset turnover*financial leverage
= 0.33
Company ABC:
Net Profit Margin = (Net income / Total revenue) * 100
= (1, 36, 052 / 18, 23, 000)* 100
= 7.46% or 0.0746
Total assets turnover = total revenue / total assets
= 18, 23, 000 / 32, 85, 000
= 0.55 or 55.49%
Financial leverage = total assets / Shareholders equity
= 32, 85, 000/ 3, 20, 000
= 10.26
Return on Equity = net profit margin*asset turnover*financial leverage
= 0.41
The return on equity of ABC Company is more than PQR Company. But Net profit margin and Asset turnover of PQR Company is more than ABC Company. If Company PQR decreases its equity capital then the ROE is more than company ABC.

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