Professional Documents
Culture Documents
Pyramid Formulas
These take a basic formula and expand it. They enable a basic formula to be decomposed. The most common one is DuPont
How Can I Analyze How I am Doing At Making Money? How I might make more money?
By analyzing each of the three levers that leads to Return on Equity ROE:
Profitability of the operations How efficient assets are being made to work Leverage ( the right mix of Equity to Debt)
DuPont System
Developed in 1919 by a finance executive at E.I. du Pont de Nemours and Co A way of visualizing the information so that everyone can see it Is a good tool for getting people started in understanding how they can have an impact on results It is simple and straightforward
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Helps to identify sources of strength and weakness in current performance Helps to focus attention on value drivers
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Efficiency
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Basic Equation!
A
Equals
Expand.
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A
x
Y
Z
Z
x
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A
x
Y
Z
Z
x
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Equals
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ROE
Net Income
= Total Equity
Debt Ratio
Total Assets
Total Equity Leverage
Sales Profitability
Total Assets
Asset Usage Efficiency
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DuPont Equation
ROE Profit Margin Total Asset Turnover Equity Multiplier Net Income Sales Total Assets Sales Total Assets Common Equity
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DuPont System
Earnings/Profitability
Asset Turnover
Asset Efficiency Usage
Investment Stream
Asset Turnover
Efficiency
Return On Equity
Investment Stream
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1,334.6 90.3
2,495.0 1,222.5
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DuPont System
Profitability
Asset Turnover
Efficiency/Asset Use
Return On Equity
1,334.6 90.3
2,495.0 1,222.5
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90.3m 2,495m
90.3m
1,334.6m
1,334.6m
2,495m
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1,334.6 90.3
2,495.0 1,222.5
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DuPont System
Profitability
1,334.6 90.3
2,495.0 1,222.5
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Return On Equity
Net Income (Profits) ROROE = Total Equity
90.3m
= 1,222.5m
90.3m = 2,495m X
2,495m 1,222.5m
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1,334.6 90.3
2,495.0 1,222.5
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Leverage is the mix of debt versus equity capital used in making profits.
Return On Assets
OK
- Do we have too much debt? - Do we have enough debt? - Is our debt capital generating profits? - Can our debt capital be put to better use?
Return On Equity
Too Low
Leverage
Too Low
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Example of DuPont
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Whitbread: 6.77% x .535 x 2.04% = 7.39% Industry: 8.10% x .74 x 2.00% = 11.99
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