AMITY UNIVERSITY RAJASTHAN
“DU-PONT
ANALYSIS OF FOUR COMPANIES”
Submitted to: Mr. Udyan Karnatak Mr. Amish Dugar Submitted by: Gaurav Bhargad BBA 3rd Semester
DECLARATION
Title of Project Report: “DU-PONT ANALYSIS OF FOUR COMPANIES”.
I declare (a)That the work presented for assessment in this dissertation Report is my own, that it has not previously been presented for another assessment and that my debts (for words, data, arguments and ideas) have been appropriately acknowledged
(b)That the work conforms to the guidelines for presentation and style set out in the relevant documentation.
Date:
Gaurav Bhargad BBA 3rd semester
CERTIFICATE
We Mr. Udyan Karnatak and Mr. Amish Dugar hereby certify that Gaurav Bhargad student of Bachelor of Business Administration at Amity Business School, Amity University Jaipur has completed the Project Report on “DU-PONT ANALYSIS OF FOUR COMPANIES” under our guidance.
Mr. Udyan Karnatak
Mr. Amish Dugar
Acknowledgement
I sincerely thank Mr. Udyan Karnatak, Mr. Amish Dugar (Research guides), Ms. Anshita Singh, for their esteemed guidance and timely support without which the research would not have been completed in time.
CONTENTS
S/NO. 1 2 3 4 5 6
INDEX Acknowledgement Introduction Objectives of study Data findings and analysis Conclusions Bibliography
PAGE NO. 4 6-8 9 10-17 18 19
INTRODUCTION
In today’s world no matter which company or whatever is the size of your company there are a few things which a person as a businessman has over his mind these are; Will I get the desired profit or not, Are my customers satisfied with my product or not, What return will I get in the near future from certain investments that I make today etc. These questions need to be answered appropriately along with these companies do provide their information like what has been the net turnover that particular financial period, what has been the profit margin or what or how much loss has the company suffered, what is its shareholders wealth, has there been an increase in its price of shares or not etc. The investors on the other hand are interested mainly in the profit margin of the company or what returns they will receive on the certain amount they had invested, which is also called Return on Equity. To calculate Return on Equity a very famous method called Du-Pont Analysis is used by the companies. Following figure depicts a Du-Pont Model:-
The name Du-Pont comes from the name of the organization itself called Du-Pont Corporation that devised this formula and started using it in 1920s. DuPont analysis (also known as the DuPont identity, DuPont equation, DuPont Model or the DuPont method) is an expression which breaks ROE (Return on Equity) into three parts. The Du Pont identity breaks down Return on Equity (that is, the returns that investors receive from the firm) into three distinct elements. This analysis enables the analyst to understand the source of superior (or inferior) return by comparison with companies in similar industries (or between industries). The Du Pont identity, however, is less useful for some industries, such as investment banking, that do not use certain concepts or for which the concepts are less meaningful. Variations may be used in certain industries, as long as they also respect the underlying structure of the Du Pont identity. Some of the examples of the industries using Du-Pont Analysis are:High turnover industries: Certain types of retail operations, particularly stores, may have very low profit margins on sales, and relatively moderate leverage. In contrast, though, groceries may have very high turnover, selling a significant multiple of their assets per year. The ROE of such firms may be particularly dependent on performance of this metric, and hence asset turnover may be studied extremely carefully for signs of under-, or, over-performance. For example, same store sales of many retailers is considered important as an indication that the firm is deriving greater profits from existing stores (rather than showing improved performance by continually opening new stores). High margin industries: Other industries, such as fashion, may derive a substantial portion of their competitive advantage from selling at a higher margin, rather than higher sales. For high-end fashion brands, increasing sales without sacrificing margin may be critical. The Du Pont identity allows analysts to determine which of the elements is dominant in any change of ROE. Steps to calculate DuPont Equation or Return on Equity is: First Calculate Profit after Tax
(Net Sales – Cost of Goods Sold – Operating Expenses – Interest – Taxes) = Profit after tax On dividing Profit after Tax by Sales we get Net Profit Margin (Profit after Tax / Sales) = Net Profit Margin Then we divide Sales by Total Assets we get Total Asset Turnover. Total Assets is combination of Net Current Asset + Fixed Asset + Other Asset. (Sales / Total Asset) = Total Asset Turnover. Then Net Profit Margin is multiplied with Total Asset Turnover to get Return on Total Assets. (Net Profit Margin x Total Asset Turnover) = Return on total Assets. Then we calculate Financial Leverage by dividing Total Assets by Net worth. Net worth is found out by subtracting Intangible Assets from Shareholder’s Fund. (Total Assets / Net Worth) = Financial Leverage. Then when we multiply Return on Total Assets with Financial Leverage we get Return on Equity. (Return on Total Assets x Financial Leverage) = Return on Equity.
Objectives of the Study ? To analyze the balance sheet of four companies
? To find out the Return on equity for them for 2008
? To prepare Du-Pont chart for the return on equity
Data Findings and Analysis: Now we calculate and compare the Return on Equity for two of the companies in Service sector. The companies being compared are TATA COMMUNICATIONS and RELIANCE COMMUNICATIONS for the year 2008.
Tata Communications:
Financial performance of the company during 2008 was as below: During the year 2008 the company earned total revenue of 34.65 billion rupees. Profit before and after the tax were 4.49 and 3.08 billion rupees. During the year the company changed its name to Tata Communications Limited and signed the Brand Equity and Brand Promotion Agreement with Tata Sons Limited the owners of intellectual property rights for the brand name Tata. The number of Shareholders has decreased from 60923 to 53680 as on 31 March 2008. While speaking of its counterpart that is Reliance Communications Limited, it is one of the fastest growing company in the telecommunications sector the company earned revenue of 22948 crore rupees as compared to previous years 19068 crore rupees. The number of shareholders was far greater than Tata Communications Limited it was 2061086 that is more than 20 lakhs while in 2007 the number of shareholders was 1977266. Here we see a rise in the number of shareholders while if we see the case of Tata Communications we see a decline in the number of shareholders. The required information from the balance sheet to calculate Return on Equity is: Total Shareholders fund – 6547.34 crore rupees Total Fixed Assets – 352.67 Current Assets – 1599.49 this includes Inventories, Sundry Debtors, Cash and Bank balances and other current assets. Revenues from telecommunication services – 3283.30 crore rupees
Total Income = 3465.33 crore rupees Operating Expenses which include salaries and wages expense also = 2663.24 Taxes = 145.52 crore rupees Goodwill = 363.42 crore rupees License fee = 20.03 crore rupees Software = 75.29 crore rupees Now we calculate first of all Profit after tax which is (Net Sales – Cost of Goods Sold – Operating Expenses – Interest – Taxes) = Profit after tax (3465.33 – 3283.30 – 2663.24 – 145.52) = -2626.73 So profit after tax is -2626.73 Now we calculate Net Profit Margin which is given by (Profit after Tax / Sales) = Net Profit Margin (-2626.73 / 3283.30) = -0.80002 Now we calculate Total Asset turnover which is given by (Sales / Total Asset) = Total Asset Turnover. 3283.30 / 1952.16 = 1.6818 Now we multiply Net Profit Margin with Total Asset Turnover to get Return on total assets -0.80002 x 1.6818 = -1.3454 Now we calculate financial leverage which is given by
(Total Assets / Net Worth) = Financial Leverage. Where Net worth is Shareholders fund – Intangible Assets. So Financial Leverage is 1952.16 / 6088.60 = 0.3206 Now we multiply Financial Leverage with Return on Total Assets to get Return on Equity. -1.3454 x 0.3206 = -0.4313 Now the information from balance sheet of Reliance Communications is Total Shareholders fund – 27994.32 crore rupees Total Fixed Assets – 52312.56 Current Assets – 9495.90 Revenues from telecommunication services – 17148.48 crore rupees Total Income – 19067.76 crore rupees Operating Expenses which include salaries and wages expense also – 4432.53 crore rupees Taxes – 317.12 crore rupees Goodwill – 3565.43 crore rupees (Net Sales – Cost of Goods Sold – Operating Expenses – Interest – Taxes) = Profit after tax (19067.76- 17148.48 – 4432.53 – 317.12) = -2830.37 (Profit after Tax / Sales) = Net Profit Margin -2830.37 / 17148.48 = -0.1650 (Sales / Total Asset) = Total Asset Turnover. 17148.48 / 61808.46 = 0.2774
(Total Assets / Net Worth) = Financial Leverage. 61808.46 / 24428.89 = 2.5301 Return on total assets = Net Profit Margin x Total asset Turnover -0.1650 x 0.2774 = -0.04577 Return on Equity is Financial Leverage x Return on total assets 2.5301 x -0.04577 = -0.1158. On the basis of return on equity we can see that though both the companies are running into losses but Reliance has suffered much less loss than its counterpart Tata Communications Limited. It was also evident from the number of shareholders in case of Tata Communications Limited the number was decreasing while in the case of Reliance Communications Limited the number was increasing. Now moving on from the service sector to the manufacturing sector we compare two most top companies Apple and Samsung as we know Samsung overtook Apple in mid-November and sold out more mobile phones than the I-phone from Apple.
Apple Inc. Apple Inc. and its wholly owned subsidiaries design, manufacture and market
personal computers, portable digital music players and mobile communications devices along with a variety of related software’s, services, peripherals and networking solutions. Some of its chief products include the I-phone4, I-phone4s which was launched in November this year, MacBook Pro, MacBook Air and the I-pods. Most of the company’s sale was from the American Market which accounted for nearly 57% of its total sales. Also the net sales increased by 35% or $8.5 billion from the previous year that is 2007. Most of the increased sales were due to the high demand of I-phone4 and MacBook Pro and Air. Balance sheet information: Net Sales - $ 32479
Cost of Goods Sold - $ 21334 Operating Expense - $ 4870 Shareholders fund - $ 21030 Total assets – 39572 which include fixed and the current assets Goodwill - $ 207 Provision for income tax - $ 2061 Net worth = Shareholders fund – intangible assets 21030 – 492 = 20538 Calculation of Return on Equity: Profit after tax = Net sales – Cost of goods sold – operating expense – Provision for income tax. (32479 – 21334 – 4870 – 2061) = 4214 Profit after tax / sales = Net profit margin 4214 / 21334 = 0.1975 Sales / total assets = Total asset turnover 21334 / 39572 = 0.5391 Total assets / Net worth = Financial leverage 39572 / 20538 = 1.9267 Net profit margin x Total asset turnover = Return on total assets 0.1975 x 0.5391 = 0.1064
Return on total assets x Financial leverage = Return on Equity 0.1064 x 1.9267 = 0.2050 That is 0.2050 x 100 = 20.50 % is the return on equity of Apple Inc.
Samsung:
Despite the global crisis or what we called the slowing down of the economies worldwide Samsung continued growth in the market which is visible by the net sales figures which was 121,294 in 2008 as compared to 98,508 in 2007. Though the operating profit and the net income did decrease operating profit 6032 in 2008 while in 2007 it was7421. In 2008 it bagged the second position in the global mobile market by shipping 198 million mobile phones worldwide. Information from the balance sheet: The figures are in millions with respect to Korean Won and in thousands with respect to American dollars. Sales – 118,376,276 Cost of sales – 88,526,410 Income tax – 616,473 Total assets – 92,317,307 Total Shareholders’ equity – 58117009 Selling, general and Administration expenses – 25,500,101 Intangible assets – 741,346 Calculation of Return on equity: Profit after tax / sales = Net profit margin
(118,376,276 – 88,526,410 – 616,473 – 25,500,101) / 88,526,410 = 0.0421 Total asset turnover = Sales / total assets 88,526,410 / 92,317,307 = 0.9589 Return on total assets = Net profit margin x total asset turnover 0.0421 x 0.9589 = 0.0403 Financial leverage = Total assets / Net worth Net worth = Shareholders fund – intangible assets 58117009 – 741346 = 57375663 Financial leverage = 92,317,307 / 57375663 = 1.6089 Return on equity = Financial leverage x Return on total asset 1.6089 x 0.0403 = 0.0648 this means 0.0648 x 100 = 6.48 % Du-Pont charts of the analyzed companies:
TATA COMMUNICATIONS Limited:
Profit after Tax (-2626.73) / Sales (3283.30) => Net Profit Margin (-0.80002) Sales (3283.30) / Total assets (1952.16) => Total asset turnover (1.6818) Total assets (1952.16) / Net worth (6088.60) => Financial leverage (0.3206) Net profit margin (-0.080002) x Total asset turnover (1.6818) => Return on total asset (-1.3454) Return on total asset (-1.3454) x Financial leverage (0.3206) => Return on equity (-0.4313)
RELIANCE COMMUNICATIONS Limited: Profit after Tax (-2830.37) / Sales (17148.48) => Net Profit Margin (-0.1650) Sales (17148.48) / Total assets (61808.46) => Total asset turnover (0.2774) Total assets (61808.46) / Net worth (24428.89) => Financial leverage (2.5301) Net profit margin (-0.1650) x Total asset turnover (0.2774) => Return on total asset (-0.04577) Return on total asset (-0.04577) x Financial leverage (2.5301) => Return on equity (-0.1158)
APPLE Inc. Profit after Tax (4214) / Sales (21334) => Net Profit Margin (0.1975) Sales (21334) / Total assets (39572) => Total asset turnover (0.5391) Total assets (39572) / Net worth (20538) => Financial leverage (1.9267) Net profit margin (0.1975) x Total asset turnover (0.5391) => Return on total asset (0.1064) Return on total asset (0.1064) x financial leverage (1.9267) => Return on equity (0.2050) SAMSUNG: Profit after Tax (3733292) / Sales (88526410) => Net Profit Margin (0.0421) Sales (88526410) / Total assets (92317307) => Total asset turnover (0.9589) Total assets (92317307) / Net worth (57375663) => Financial leverage (1.6089) Net profit margin (0.0421) x Total asset turnover (0.9589) => Return on total asset (0.0403) Return on total asset (0.0403) x financial leverage (1.6089) => Return on equity (0.0648)
Conclusions
A comprehensive financial statement will provide the insights into the firms working that is what is its standing among its competitors, how much shareholder’s strength it has, has it increased or decreased from the previous year, what is the total number of assets it has both fixed, current as well as intangible. We know that every meaningful analysis will begin with a qualitative enquiry as to the strategies and policies of the subject company; next goals and objectives will be established providing a basis for interpreting the results. With Du-Pont analysis we can calculate the Return on Equity for a give company that is the returns that investors get from the company if it is high then it is good for the company as well as investors while if it is negative it shows the company is running into losses and so are the investors.
Bibliography
(n.d.). Retrieved December 18, 2011, from www.slideshare.com. (n.d.). Apple Inc. annual report 2007-08. (n.d.). Apple Inc. annual report 2008. Maheshwari, S. (2008). financial management. (n.d.). Reliance communications annual report 2007-08. (n.d.). Reliance Communications annual report 2008-09. (n.d.). Samsung annual report 2008-09. (n.d.). Tata communications annual report 2007-08.
doc_860920503.docx
“DU-PONT
ANALYSIS OF FOUR COMPANIES”
Submitted to: Mr. Udyan Karnatak Mr. Amish Dugar Submitted by: Gaurav Bhargad BBA 3rd Semester
DECLARATION
Title of Project Report: “DU-PONT ANALYSIS OF FOUR COMPANIES”.
I declare (a)That the work presented for assessment in this dissertation Report is my own, that it has not previously been presented for another assessment and that my debts (for words, data, arguments and ideas) have been appropriately acknowledged
(b)That the work conforms to the guidelines for presentation and style set out in the relevant documentation.
Date:
Gaurav Bhargad BBA 3rd semester
CERTIFICATE
We Mr. Udyan Karnatak and Mr. Amish Dugar hereby certify that Gaurav Bhargad student of Bachelor of Business Administration at Amity Business School, Amity University Jaipur has completed the Project Report on “DU-PONT ANALYSIS OF FOUR COMPANIES” under our guidance.
Mr. Udyan Karnatak
Mr. Amish Dugar
Acknowledgement
I sincerely thank Mr. Udyan Karnatak, Mr. Amish Dugar (Research guides), Ms. Anshita Singh, for their esteemed guidance and timely support without which the research would not have been completed in time.
CONTENTS
S/NO. 1 2 3 4 5 6
INDEX Acknowledgement Introduction Objectives of study Data findings and analysis Conclusions Bibliography
PAGE NO. 4 6-8 9 10-17 18 19
INTRODUCTION
In today’s world no matter which company or whatever is the size of your company there are a few things which a person as a businessman has over his mind these are; Will I get the desired profit or not, Are my customers satisfied with my product or not, What return will I get in the near future from certain investments that I make today etc. These questions need to be answered appropriately along with these companies do provide their information like what has been the net turnover that particular financial period, what has been the profit margin or what or how much loss has the company suffered, what is its shareholders wealth, has there been an increase in its price of shares or not etc. The investors on the other hand are interested mainly in the profit margin of the company or what returns they will receive on the certain amount they had invested, which is also called Return on Equity. To calculate Return on Equity a very famous method called Du-Pont Analysis is used by the companies. Following figure depicts a Du-Pont Model:-
The name Du-Pont comes from the name of the organization itself called Du-Pont Corporation that devised this formula and started using it in 1920s. DuPont analysis (also known as the DuPont identity, DuPont equation, DuPont Model or the DuPont method) is an expression which breaks ROE (Return on Equity) into three parts. The Du Pont identity breaks down Return on Equity (that is, the returns that investors receive from the firm) into three distinct elements. This analysis enables the analyst to understand the source of superior (or inferior) return by comparison with companies in similar industries (or between industries). The Du Pont identity, however, is less useful for some industries, such as investment banking, that do not use certain concepts or for which the concepts are less meaningful. Variations may be used in certain industries, as long as they also respect the underlying structure of the Du Pont identity. Some of the examples of the industries using Du-Pont Analysis are:High turnover industries: Certain types of retail operations, particularly stores, may have very low profit margins on sales, and relatively moderate leverage. In contrast, though, groceries may have very high turnover, selling a significant multiple of their assets per year. The ROE of such firms may be particularly dependent on performance of this metric, and hence asset turnover may be studied extremely carefully for signs of under-, or, over-performance. For example, same store sales of many retailers is considered important as an indication that the firm is deriving greater profits from existing stores (rather than showing improved performance by continually opening new stores). High margin industries: Other industries, such as fashion, may derive a substantial portion of their competitive advantage from selling at a higher margin, rather than higher sales. For high-end fashion brands, increasing sales without sacrificing margin may be critical. The Du Pont identity allows analysts to determine which of the elements is dominant in any change of ROE. Steps to calculate DuPont Equation or Return on Equity is: First Calculate Profit after Tax
(Net Sales – Cost of Goods Sold – Operating Expenses – Interest – Taxes) = Profit after tax On dividing Profit after Tax by Sales we get Net Profit Margin (Profit after Tax / Sales) = Net Profit Margin Then we divide Sales by Total Assets we get Total Asset Turnover. Total Assets is combination of Net Current Asset + Fixed Asset + Other Asset. (Sales / Total Asset) = Total Asset Turnover. Then Net Profit Margin is multiplied with Total Asset Turnover to get Return on Total Assets. (Net Profit Margin x Total Asset Turnover) = Return on total Assets. Then we calculate Financial Leverage by dividing Total Assets by Net worth. Net worth is found out by subtracting Intangible Assets from Shareholder’s Fund. (Total Assets / Net Worth) = Financial Leverage. Then when we multiply Return on Total Assets with Financial Leverage we get Return on Equity. (Return on Total Assets x Financial Leverage) = Return on Equity.
Objectives of the Study ? To analyze the balance sheet of four companies
? To find out the Return on equity for them for 2008
? To prepare Du-Pont chart for the return on equity
Data Findings and Analysis: Now we calculate and compare the Return on Equity for two of the companies in Service sector. The companies being compared are TATA COMMUNICATIONS and RELIANCE COMMUNICATIONS for the year 2008.
Tata Communications:
Financial performance of the company during 2008 was as below: During the year 2008 the company earned total revenue of 34.65 billion rupees. Profit before and after the tax were 4.49 and 3.08 billion rupees. During the year the company changed its name to Tata Communications Limited and signed the Brand Equity and Brand Promotion Agreement with Tata Sons Limited the owners of intellectual property rights for the brand name Tata. The number of Shareholders has decreased from 60923 to 53680 as on 31 March 2008. While speaking of its counterpart that is Reliance Communications Limited, it is one of the fastest growing company in the telecommunications sector the company earned revenue of 22948 crore rupees as compared to previous years 19068 crore rupees. The number of shareholders was far greater than Tata Communications Limited it was 2061086 that is more than 20 lakhs while in 2007 the number of shareholders was 1977266. Here we see a rise in the number of shareholders while if we see the case of Tata Communications we see a decline in the number of shareholders. The required information from the balance sheet to calculate Return on Equity is: Total Shareholders fund – 6547.34 crore rupees Total Fixed Assets – 352.67 Current Assets – 1599.49 this includes Inventories, Sundry Debtors, Cash and Bank balances and other current assets. Revenues from telecommunication services – 3283.30 crore rupees
Total Income = 3465.33 crore rupees Operating Expenses which include salaries and wages expense also = 2663.24 Taxes = 145.52 crore rupees Goodwill = 363.42 crore rupees License fee = 20.03 crore rupees Software = 75.29 crore rupees Now we calculate first of all Profit after tax which is (Net Sales – Cost of Goods Sold – Operating Expenses – Interest – Taxes) = Profit after tax (3465.33 – 3283.30 – 2663.24 – 145.52) = -2626.73 So profit after tax is -2626.73 Now we calculate Net Profit Margin which is given by (Profit after Tax / Sales) = Net Profit Margin (-2626.73 / 3283.30) = -0.80002 Now we calculate Total Asset turnover which is given by (Sales / Total Asset) = Total Asset Turnover. 3283.30 / 1952.16 = 1.6818 Now we multiply Net Profit Margin with Total Asset Turnover to get Return on total assets -0.80002 x 1.6818 = -1.3454 Now we calculate financial leverage which is given by
(Total Assets / Net Worth) = Financial Leverage. Where Net worth is Shareholders fund – Intangible Assets. So Financial Leverage is 1952.16 / 6088.60 = 0.3206 Now we multiply Financial Leverage with Return on Total Assets to get Return on Equity. -1.3454 x 0.3206 = -0.4313 Now the information from balance sheet of Reliance Communications is Total Shareholders fund – 27994.32 crore rupees Total Fixed Assets – 52312.56 Current Assets – 9495.90 Revenues from telecommunication services – 17148.48 crore rupees Total Income – 19067.76 crore rupees Operating Expenses which include salaries and wages expense also – 4432.53 crore rupees Taxes – 317.12 crore rupees Goodwill – 3565.43 crore rupees (Net Sales – Cost of Goods Sold – Operating Expenses – Interest – Taxes) = Profit after tax (19067.76- 17148.48 – 4432.53 – 317.12) = -2830.37 (Profit after Tax / Sales) = Net Profit Margin -2830.37 / 17148.48 = -0.1650 (Sales / Total Asset) = Total Asset Turnover. 17148.48 / 61808.46 = 0.2774
(Total Assets / Net Worth) = Financial Leverage. 61808.46 / 24428.89 = 2.5301 Return on total assets = Net Profit Margin x Total asset Turnover -0.1650 x 0.2774 = -0.04577 Return on Equity is Financial Leverage x Return on total assets 2.5301 x -0.04577 = -0.1158. On the basis of return on equity we can see that though both the companies are running into losses but Reliance has suffered much less loss than its counterpart Tata Communications Limited. It was also evident from the number of shareholders in case of Tata Communications Limited the number was decreasing while in the case of Reliance Communications Limited the number was increasing. Now moving on from the service sector to the manufacturing sector we compare two most top companies Apple and Samsung as we know Samsung overtook Apple in mid-November and sold out more mobile phones than the I-phone from Apple.
Apple Inc. Apple Inc. and its wholly owned subsidiaries design, manufacture and market
personal computers, portable digital music players and mobile communications devices along with a variety of related software’s, services, peripherals and networking solutions. Some of its chief products include the I-phone4, I-phone4s which was launched in November this year, MacBook Pro, MacBook Air and the I-pods. Most of the company’s sale was from the American Market which accounted for nearly 57% of its total sales. Also the net sales increased by 35% or $8.5 billion from the previous year that is 2007. Most of the increased sales were due to the high demand of I-phone4 and MacBook Pro and Air. Balance sheet information: Net Sales - $ 32479
Cost of Goods Sold - $ 21334 Operating Expense - $ 4870 Shareholders fund - $ 21030 Total assets – 39572 which include fixed and the current assets Goodwill - $ 207 Provision for income tax - $ 2061 Net worth = Shareholders fund – intangible assets 21030 – 492 = 20538 Calculation of Return on Equity: Profit after tax = Net sales – Cost of goods sold – operating expense – Provision for income tax. (32479 – 21334 – 4870 – 2061) = 4214 Profit after tax / sales = Net profit margin 4214 / 21334 = 0.1975 Sales / total assets = Total asset turnover 21334 / 39572 = 0.5391 Total assets / Net worth = Financial leverage 39572 / 20538 = 1.9267 Net profit margin x Total asset turnover = Return on total assets 0.1975 x 0.5391 = 0.1064
Return on total assets x Financial leverage = Return on Equity 0.1064 x 1.9267 = 0.2050 That is 0.2050 x 100 = 20.50 % is the return on equity of Apple Inc.
Samsung:
Despite the global crisis or what we called the slowing down of the economies worldwide Samsung continued growth in the market which is visible by the net sales figures which was 121,294 in 2008 as compared to 98,508 in 2007. Though the operating profit and the net income did decrease operating profit 6032 in 2008 while in 2007 it was7421. In 2008 it bagged the second position in the global mobile market by shipping 198 million mobile phones worldwide. Information from the balance sheet: The figures are in millions with respect to Korean Won and in thousands with respect to American dollars. Sales – 118,376,276 Cost of sales – 88,526,410 Income tax – 616,473 Total assets – 92,317,307 Total Shareholders’ equity – 58117009 Selling, general and Administration expenses – 25,500,101 Intangible assets – 741,346 Calculation of Return on equity: Profit after tax / sales = Net profit margin
(118,376,276 – 88,526,410 – 616,473 – 25,500,101) / 88,526,410 = 0.0421 Total asset turnover = Sales / total assets 88,526,410 / 92,317,307 = 0.9589 Return on total assets = Net profit margin x total asset turnover 0.0421 x 0.9589 = 0.0403 Financial leverage = Total assets / Net worth Net worth = Shareholders fund – intangible assets 58117009 – 741346 = 57375663 Financial leverage = 92,317,307 / 57375663 = 1.6089 Return on equity = Financial leverage x Return on total asset 1.6089 x 0.0403 = 0.0648 this means 0.0648 x 100 = 6.48 % Du-Pont charts of the analyzed companies:
TATA COMMUNICATIONS Limited:
Profit after Tax (-2626.73) / Sales (3283.30) => Net Profit Margin (-0.80002) Sales (3283.30) / Total assets (1952.16) => Total asset turnover (1.6818) Total assets (1952.16) / Net worth (6088.60) => Financial leverage (0.3206) Net profit margin (-0.080002) x Total asset turnover (1.6818) => Return on total asset (-1.3454) Return on total asset (-1.3454) x Financial leverage (0.3206) => Return on equity (-0.4313)
RELIANCE COMMUNICATIONS Limited: Profit after Tax (-2830.37) / Sales (17148.48) => Net Profit Margin (-0.1650) Sales (17148.48) / Total assets (61808.46) => Total asset turnover (0.2774) Total assets (61808.46) / Net worth (24428.89) => Financial leverage (2.5301) Net profit margin (-0.1650) x Total asset turnover (0.2774) => Return on total asset (-0.04577) Return on total asset (-0.04577) x Financial leverage (2.5301) => Return on equity (-0.1158)
APPLE Inc. Profit after Tax (4214) / Sales (21334) => Net Profit Margin (0.1975) Sales (21334) / Total assets (39572) => Total asset turnover (0.5391) Total assets (39572) / Net worth (20538) => Financial leverage (1.9267) Net profit margin (0.1975) x Total asset turnover (0.5391) => Return on total asset (0.1064) Return on total asset (0.1064) x financial leverage (1.9267) => Return on equity (0.2050) SAMSUNG: Profit after Tax (3733292) / Sales (88526410) => Net Profit Margin (0.0421) Sales (88526410) / Total assets (92317307) => Total asset turnover (0.9589) Total assets (92317307) / Net worth (57375663) => Financial leverage (1.6089) Net profit margin (0.0421) x Total asset turnover (0.9589) => Return on total asset (0.0403) Return on total asset (0.0403) x financial leverage (1.6089) => Return on equity (0.0648)
Conclusions
A comprehensive financial statement will provide the insights into the firms working that is what is its standing among its competitors, how much shareholder’s strength it has, has it increased or decreased from the previous year, what is the total number of assets it has both fixed, current as well as intangible. We know that every meaningful analysis will begin with a qualitative enquiry as to the strategies and policies of the subject company; next goals and objectives will be established providing a basis for interpreting the results. With Du-Pont analysis we can calculate the Return on Equity for a give company that is the returns that investors get from the company if it is high then it is good for the company as well as investors while if it is negative it shows the company is running into losses and so are the investors.
Bibliography
(n.d.). Retrieved December 18, 2011, from www.slideshare.com. (n.d.). Apple Inc. annual report 2007-08. (n.d.). Apple Inc. annual report 2008. Maheshwari, S. (2008). financial management. (n.d.). Reliance communications annual report 2007-08. (n.d.). Reliance Communications annual report 2008-09. (n.d.). Samsung annual report 2008-09. (n.d.). Tata communications annual report 2007-08.
doc_860920503.docx