What Is Fundamental Equity Analysis?

DuPont Analysis uses the relationship between several major financial ratios to comprehensively analyze a company's financial situation. Specifically, it is a classic method used to evaluate the company's profitability and return on shareholders' equity, and to evaluate corporate performance from a financial perspective. The basic idea is to decompose the return on the company's net assets into multiple financial ratio products step by step, which will help in-depth analysis and comparison of business performance. Because this analysis method was first used by DuPont in the United States, it is called DuPont analysis.

DuPont analysis

The most significant feature of the DuPont model is that several ratios used to evaluate the operating efficiency and financial status of an enterprise are organically combined according to its internal connections to form a complete index system, which is finally comprehensively reflected by the return on equity.

With this method,

Basic ideas of DuPont analysis

1,

Financial Indicator Relationships of DuPont Analysis

The relationship of several major financial indicators in DuPont analysis is:

From

From

Financial goals

About the company

First, a deep understanding of DuPont analysis and corporate finance

I. The goal of modern financial management is

Application of DuPont analysis method in the company

Many companies abroad have adopted economic value added (EVA) or cash return rate (CFROE) as a measure of company performance, and some foreign companies have also widely adopted balanced scorecards or performance evaluation methods similar to scorecards to conduct company performance. Assessment. For Chinese SMEs, how to conduct performance appraisal is also a concern of many business owners. The author found in the long-term consulting process that many companies (especially private companies and small and medium-sized enterprises) are not accustomed to using the return on net assets to reflect the return on shareholder value. The owners of the company are concerned about indicators such as profit levels, sales income, and gross profit levels.

In fact, the reasonable use of return on equity (ROE) for corporate management is a very convenient means for many companies, and it can also help company managers to find problems in the company's operations and find ways to improve . In the process of business consulting practice, this method has been used consciously to help private enterprises, especially financial management, and has achieved good results.

Structure of DuPont Analysis

In corporate financial management, layer-by-layer decomposition methods are generally used to determine the problems of corporate management. In this decomposition process, regardless of the size of the enterprise and the complexity of the business, the method can be used to remove false memories and eliminate various doubtful goals in front of it to achieve the purpose. In fact, this method has been explained in detail in management accounting or other financial management methods, but very few financial personnel can use it well in actual work.

First, you can understand the general structure of the DuPont analysis method from the following figure:

Return on equity = Return on assets * Financial leverage

Return on assets = profit margin on sales * asset turnover

Financial leverage = total assets / owner's equity

From the DuPont analysis model, it is clear that the reflection of a company's performance will be reflected through sales returns, asset returns and financial leverage adjustments. This model can give good enlightenment. In the process of company management, you can analyze each part according to this layered decomposition method, and be able to solve the problem. The specific fields of use are:

Regular or non-scheduled financial analysis and value tree analysis methods can reflect the logical relationship between the key factors affecting the return on net assets in a comprehensive indicator of return on net assets; financial analysts can use the value tree layer by layer Analyze the company's finances, and this analysis is more logical and comprehensive;

Combined with the budget management method, the difference between the actual situation and the budget situation can well reflect the impact on the overall return on net assets.

When confirming key performance indicators, especially the use of financial indicators to reflect the company's performance, it can help confirm the impact of key performance indicators and key success factors on comprehensive indicators, which is more obvious in the use of management techniques such as balanced score cards for performance management. ;

The following is a case that fully illustrates the impact of the use of DuPont analysis on the company:

Basic situation of the company: The company belongs to a private company in the manufacturing industry, has a long operating history, and has a good reputation in the industry. The company's general manager is a technical management staff working hard from the production site and has not received systematic management training. The company is in good financial condition and has never dealt with financial institutions.

The company's return on net assets was 28.38% in 2000, 30.97% in 2001, and 18.50% in 2002. From the value analysis chart above, we can know that the return on net assets was the highest in 2001, and the net profit was the most obvious among the factors affecting ROE. This is most evident in the histogram.

The company's ROE is very confusing, thinking that the company can still give investors good returns, but there are the following questions:

What are the sources of drastic fluctuations in return on net assets

The calculation shows that the company's financial leverage has not changed much in three years, which shows that financial leverage is not a key factor in the company's return on net assets. It is found that the company's sales profit rate and asset turnover rate have changed significantly, which may be the cause of the problem. The decline in sales profit margin indicates that the profitability of the company's products is continuously decreasing. Possible reasons are:

The product has entered a recession period or the market has been sluggish, and there are many competitors, leading to a decrease in product profitability;

The cost control of the product cannot reach the target effectively;

The company failed to achieve its goals in marketing and market development, and the company's overall profitability continued to decrease;

What is the average profit level of the industry and what is the difference from the average profit level;

Because the decline in profitability is faster than the company's efforts in asset management and capital allocation, which leads to a reduction in the company's overall return on net assets, this trend puts a lot of pressure on the company's management.

The higher level of the company's ROE comes from the use of the company's financial leverage and the improvement of its asset management level. Whether the higher ROE of the company caused by the strengthening of internal management is a source of long-term profit for the company. However, the decline in the profitability of the company's products has also led to the company's ROE performance not being able to reach the ideal state. Through this analysis, we can well grasp how to improve the performance of ROE, and need well-targeted measures to implement.

In the process of net asset return management, the company needs to pay close attention to the comprehensive utilization and development of indicators, not the stand-alone indicators. In this case, the general manager of the company has never known how to invest and seize good investment opportunities. Therefore, a large amount of cash is stored in the bank and the profit is not high. Among current assets, the proportion of cash in total assets was 43.58% in 2000, 41.14% in 2001, and 40.02% in 2002. If you reduce the cash ratio and invest cash in other more profitable projects, perhaps the company The ROE will be better and more impressive.

The meaning of several indicators of DuPont analysis

Net profit margin on sales: The profitability of the product can be analyzed as a separate product during analysis, or the net profit margin on sales can be confirmed by product line;

Asset turnover rate: reflects the efficiency of asset management;

Financial leverage: Reflects the company's use of financial financing to promote the owner's return on investment;

When using the DuPont analysis method, it needs to be compared with industry data to better position the company in the industry. This is also a good idea.

But DuPont analysis also has its shortcomings. The issues that must be paid attention to when using this method and the index of return on net assets:

ROE only reflects the short-term one-year financial benefits, but does not reflect the long-term investment's promotion of the company's long-term profitability; if the company's long-term investment needs to reflect economic value over a longer period of time, ROE's performance may be unsatisfactory.

ROE does not adequately reflect the risk that the company takes to obtain benefits; as a result indicator, it cannot measure how much actual and potential risks the company has taken in the process of obtaining the above financial returns, and the company may need to solve it from other channels these questions.

ROE reflects the return of the company's owner's equity, but does not reflect the company's market value. Sometimes, the company's return on net assets is inconsistent with the market value performance. The company's market value reflects the company's true value, which is the investor's recognition of the company's value. Of course, ROE performance can affect the company's value market. which performed.