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Du-Pont Analysis: Financial Statement Information of Stylecraft Limited

The document discusses DuPont analysis, a financial ratio model developed in the 1920s by DuPont Corporation. The model breaks down the return on equity (ROE) ratio to examine how different factors like profit margins, asset turnover, and financial leverage impact a company's ability to generate returns for shareholders. The summary provides an example application of the DuPont analysis to Stylecraft Limited for 2018-2019, calculating ROE under 3 and 5 components. Analysis suggests Stylecraft improved profit margins in 2019 while managing costs better, but had less efficient asset use and higher debt in 2018, negatively impacting its ROE.

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102 views

Du-Pont Analysis: Financial Statement Information of Stylecraft Limited

The document discusses DuPont analysis, a financial ratio model developed in the 1920s by DuPont Corporation. The model breaks down the return on equity (ROE) ratio to examine how different factors like profit margins, asset turnover, and financial leverage impact a company's ability to generate returns for shareholders. The summary provides an example application of the DuPont analysis to Stylecraft Limited for 2018-2019, calculating ROE under 3 and 5 components. Analysis suggests Stylecraft improved profit margins in 2019 while managing costs better, but had less efficient asset use and higher debt in 2018, negatively impacting its ROE.

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নাফিস ইকবাল আকিল
Copyright
© © All Rights Reserved
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Du-Pont Analysis

The Dupont Corporation developed Du-Pont analysis in the 1920s. The Dupont analysis also
called the Dupont model is a financial ratio based on the return on equity ratio. The return on
equity ratio or ROE is a profitability ratio which is related with company’s ultimate goals.
ROE is the most important indicator for investor and creditor that show ability of a company
to generate profits from its shareholders investments. In other words, this model breaks down
the return on equity ratio to explain how companies can increase their return for investors.
This model was developed to appraisal ROE and the effects different business performance
measures have on this ratio. So, investors are not looking for large or small output numbers
from this model. Instead, they are looking to analyze what is causing the current ROE.

Du-Pont Analysis for Stylecraft Limited

Financial Statement information of Stylecraft Limited:


2018 (in Millions) 2019 (in Millions)
Revenue 3254.259 3519.776
Net Income 15.538 39.100
Total Asset 1305.191 1379.904
Shareholders Equity 294.493 333.593
EBT 42.450 62.425
EBIT 44.332 63.476

Following this information Du-Pont Analysis for Stylecraft Limited under


three components –
Formula for ROE,
ROE= profit Margin × Assets turnover × Equity Multiplier
Net Income Revenue Total Assets
= Revenue × Total Asset × shareholders Equity

ROE for two years,


2018 = 0.48% * 2.493* 4.432 = 5.28%
2019 = 1.11% * 2.551* 4.136 = 11.72%

Analysis
In 2019, Stylecraft Limited is able to generate higher sales due to maintaining a lower cost of
goods which is reflected by its high profit margin. On the other hands, assets turnover in 2018
slightly lower than 2019 which is indicates that the company isn’t using its assets efficiently
and most likely have management or production problems in this year. And also, debt
financing in 2018 is higher which is also affected on the return on equity.

Du-Pont Analysis for Stylecraft Limited under Five (05) components –


Formula for ROE,
ROE= (Tax Burden× Interest Burden × Operating Income margin × Assets turnover
× Equity Multiplier)
Net Income EBIT EBIT Revenue Total Assets
= × × × ×
EBT EBT Revenue Total Asset shareholders Equity

ROE for two years,


2018 = 36.60% * 95.75% * 1.36% * 2.493* 4.432 = 5.28%
2019 = 62.64%* 98.34% *1.80%* 2.551* 4.136 = 11.72%

Analysis
In 2018, Stylecraft Limited profit is highly affected by tax. But the opposite scenario is
shown in 2019. Both 2018 and 2019, interest expense is almost same. Stylecraft Limited
managed its costs and increasing its profit which is the indication of higher operating profit
margin in 2019 than 2018. In 2018, company maybe not efficient in convert revenue into
profit. And also, there is the possibility of high costs of goods sold or operating expenses.
Debt financing or financial leverage is higher that why company s profit is influenced by
interest expense which is reflected in ROE of 2018.

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