Top Banner
ROCE PBIT/CE Profit Margin Asset Turnover Asset Leverage RONW PAT/NW Profit Margin PAT/ SALES Asset Turnover SALES/ TOTAL ASSETS Asset Leverage TOTAL ASSETS/ NET WORTH Dupont Analysis DUPONT Analysis of Some Selected Indian Companies DUPONT Analysis of RONW Ashok Leyland DUPONT 2004-05 2003-04 2002-03 RONW 20.02% 16.30% 12.40% Profit Margin 5.6% 4.9% 3.91% Asset Turnover 142.9% 155.1% 250.3% Asset Leverage 249.9% 213.48% 252.08% DUPONT Analysis of ROCE
23
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: Dupont Analysis

ROCEPBIT/CE

Profit MarginPBIT/ SALES

Asset TurnoverSALES/ TOTAL ASSETS

Asset LeverageTOTAL ASSETS/ CE

RONWPAT/NW

Profit MarginPAT/ SALES

Asset TurnoverSALES/ TOTAL ASSETS

Asset LeverageTOTAL ASSETS/ NET WORTH

Dupont Analysis

DUPONT Analysis of Some Selected Indian Companies

DUPONT Analysis of RONW

Ashok Leyland

DUPONT 2004-05 2003-04 2002-03

RONW 20.02% 16.30% 12.40%

Profit Margin 5.6% 4.9% 3.91%

Asset Turnover 142.9% 155.1% 250.3%

Asset Leverage 249.9% 213.48% 252.08%

DUPONT Analysis of ROCE

Page 2: Dupont Analysis

ROTAPBIT/TA

TurnoverRevenues/Total Asset

Operating Profit PBIT/ Revenues

Current Asset Leverage

Sales / CA

DUPONT 2004-05 2003-04 2002-03

ROCE 15.9% 17% 10.1%

Profit Margin 7.37% 7.29% 5.53%

Asset Turnover 142.9% 155.1% 126%

Asset Leverage 151.1% 150.2% 144.6%

Implications:

The ROCE shows a declining trend except for the last year. This was largely due to decline in Profit Margins. The company has however tamed the buck by increasing the asset turnover to arrive at a better overall ROCE.

The ROCE is not as good as NALCO (28%) but equivalent to that of STERLITE

DUPONT Analysis of ROTA

DUPONT 2004-05 2003-04 2002-03

ROTA 15.9% 17% 10.1%

Turnover 125.8% 134.7% 143.5%

Page 3: Dupont Analysis

Operating Profit 8.38% 8.39% 8.38%

Current Asset Leverage 223% 268.3% 229.3%

Bajaj Auto

DUPONT ANALYSIS

DuPont Analysis :

Dupont Analysis is an approach to analyse the firm by evaluating inter relationships

among many of the performance measures. In the Dupont Analysis we try to find out

what are the factors/drivers that are causing the profits to move up. By identifying these

factors/drivers we can concentrate on them and improve our efficiency.

ROTA2004 - 05

Page 4: Dupont Analysis

ROTA = PBIT / Total Asset0.1311

PBIT / Sales

0.1895

COGS / Sales

0.7151

Expenses / Sales

0.1624

Salary / Sales

0.0434

Dep.n / Sales

0.0323

Sales / Total Asset

0.7638

Sales / FA

5.0284

Sales / CA

2.2151

Sales / Debtors

32.5377

Sales / Cash

52.8214

Sales / Inventory

25.5861

Page 5: Dupont Analysis

ROTA = PBIT / Total Asset

0.1345

PBIT / Sales

0.2022

COGS / Sales

0.6728

Expenses / Sales

0.1869

Salary / Sales

0.0506

Dep/ Sales

0.0378

Sales / Total Asset

0.6652

Sales / FA

3.8592

Sales / CA

2.3162

Sales / Debtors

35.513

Sales / Cash

59.8892

Sales / Inventory

23.4709

2003 - 04

Page 6: Dupont Analysis

ROCE 2002 - 2003

ROCE 2004 - 05

Page 7: Dupont Analysis

TA Chart

7510071482

61939

0

10000

20000

30000

40000

50000

60000

70000

80000

2004-05 2003-04 2002-03TA (mn)

RONW = PAT / NW

0.1794

PAT / Sales

0.1337

Sales / Total Asset

0.7638

Sales / FA

5.0284

Sales / CA

2.2151

Sales / Debtor

32.5377

Sales / Cash

52.7728

Sales / Inventory

25.5861

Total Asset / NW

1.7571

Total Asset / Capital

74.2094

Total Asset / R & S

1.8621

RONW 2004 - 05

Page 8: Dupont Analysis

RONW = PAT / NW

0.1917

PAT / Sales

0.1538

Sales / Total Asset

0.6652

Sales / FA

3.8594

Sales / CA

2.3162

Sales / Debtor

35.5131

Sales / Cash

59.8892

Sales / Inventory

23.4709

Total Asset / NW

1.8730

Total Asset / Capital

70.6344

Total Asset / R & S

1.9898

RONW 2003 - 2004

Page 9: Dupont Analysis

DRLDuPont Analysis

The three components of DuPont measure the profitability, efficiency and the degree of leverage of the firm. The DuPont chart makes an intra firm comparison among these three parameters for three years.

RONW = PAT / NW

0.1578

PAT / Sales

O.1295

Sales / Total Asset

0.6715

Sales / FA

3.2037

Sales / CA

1.9299

Sales / Debtor

24.9048

Sales / Cash

138.6367

Sales / Inventory

19.9957

Total Asset / NW

1.8148

Total Asset / Capital

61.2046

Total Asset / R & S

1.973

Page 10: Dupont Analysis

The profitability of the firm as shown by the first component has decreased from 0.26 to 0.05 which is not good for the company. This can be further explained as a consequence of the increase in the cost of goods sold which is in turn due to the increase in raw material and labor costs. There is also a marginal increase in the marketing expenses which may not significantly affect profitability. Therefore the major causes for poor profitability are rising material and labor costs.

The second component is indicative of the asset use efficiency of the firm. The asset turnover has decreased from 0.73 to 0.59. This shows a declining trend in the usage efficiency of the assets. When the DuPont chart is used to track down the area of concern, we can find that fixed asset turnover has remained fairly constant and in some cases even improved over the three years. However, current asset turnover is not so satisfactory. Even among the current assets, we can find that the ratio of sales to cash has been fairly consistent. Stock turnover has on the other hand declined and this is the reason for inefficient asset usage. Stock here implies both raw materials and finished goods. We can see that the stock turnover ratio has declined from 7.1 to 5.69 thereby causing resource inefficiency.

The third component shows the degree of leverage of the firm. Though the ratio between total assets and capital employed has remained fairly consistent, on closer examination, one can find that there is a huge anomaly with respect to long term loans. There is a steep decline from 62 times to 11 times. This shows how the leverage of the firm has changed as a result of long term loans. The company has taken huge long term loans to finance its activities and this has rightly been reflected in the DuPont chart.

DU-PONT CHARTS Tata Motors

ROCE-2005

Page 11: Dupont Analysis

In case of Tata Motors Ltd. we can see that the RoCE was at 0.28 i.e. for every Rs.100 of CE the profit(PBIT) is Rs.23, in 2002-2003. this went up to 0.43 i.e. for every Rs.100 of CE the profit(PBIT) is Rs.43, in 2003-2004 and took a plunge in 2004-2005 when it went down to 0.33 i.e. for every Rs.100 of CE the profit(PBIT) is Rs.33. What seems strange is that the other ratios have been indicating a bull run for the company and this is the first ratio that the picture isn’t all that rosy as it seems to be. To analyze what is going wrong, we will have to scrutinize the balance sheet a little more closely. Immediately we’ll find that two components of CE have

Page 12: Dupont Analysis

drastically gone up. The share capital has gone up, and complementing that increase, the long term debts have increased drastically. Though the secured loans have gone down, a big chunk of unsecured loans has come in. this rate of increase in CE is higher than the rate at which the PBIT has been increasing. This points at possibility of better corporate governance to boost up ROI on CE i.e. RoCE, and hence benefiting the Profit Generating Ability(PGA) of the company.

RONW – 200 5

Tata Motors has been enjoying a steady increase in the RoNW last three financial years. However, there has been a slight slowdown in this increase in rate between the FY ended 2004 and the FY ended 2005. As can be seen in the balance sheet, the PAT as well as the PBIT has been increasing. Therefore the only other reason why this could be happening is because of the

Page 13: Dupont Analysis

increase in the share capital. This fact can be corroborated from the increase in the share capital as can be seen in the balance sheet.

ROTA - 20 05

Tata Motors Ltd. has faced a situation similar to the previous ratio here. The RoTA has gone up in the FYs ended 2002-2003 and 2003-2004. Here after seeing the balance sheet, we can find out

Page 14: Dupont Analysis

the reason. The assets have been increasing at faster rate as compared to the PBIT. This is also proves another thing, the investment decisions of the company are not garnering enough profits.

8.0 DuPont Analysis:Hero Honda

8.0.1 Return on Net Worth

Page 15: Dupont Analysis

8.0.2 Return on Capital Employed

Page 16: Dupont Analysis

8.0.3 Return on Total Asset

Page 17: Dupont Analysis

The return on Net Worth of Hero Honda is a staggering 63.95%, which is way above those of Bajaj & TVS. The major rise behind the huge RONW is the fact that the Net worth of Hero Honda is way lower as compared that of its competitors. The Net Worth of Hero Honda stands at Rs 1139 crore, out of which capital comprises of Rs 40 crore, whereas that of Bajaj stands at Rs 3694 crore. One of the strengths of Hero Honda is the efficient working capital management as a result its able to reduce its cost to the minimum extent possible. It has a policy of financing even its fixed assets by current liability. As a result it is using a source which either does not has any cost or if it has any cost its very minimum. The following important facts stand out from the Dupont analysis:

Its cogs/sales ratio has fallen from 85% in 01-02 to 82% in 03-04. This reflects the large scale cost reduction measures initiated by Hero Honda. In this tough competition where selling price cannot be increased, cost reduction is the only option available for increasing the profits.

Its sales/FA ratio increased from 925% in 01-02 to 1019% in 03-04. This shows that Hero Honda is able to generate more sales from same amount of Fixed assets. It shows that they are also undertaking measures to increase productivity, which is of utmost importance for survival in modern competitive world.

Its sales/cash ratio has increased from 4166% to 16157%, which reflects the after effect of a sound cash management policy. The company is maintaining cash which is optimum, considering its future plans.

The sales/debtors ratio has increased from 4522%in 01-02 to 13693% in 03-04, which shows the efficient credit and follow up procedure. Thus the company is ale to play with its creditors because o its position as a market leader and for other reasons as well, which in turn reduces the financing needs of the company.

Sales/inventories ratio rose to 3186% in 03-04 from 2545% in 01-02, This is also the effect of working capital management policies.

Similarly ROCE of Hero Honda is around 82% for last few years, whereas that of its competitors is hovering around the 20% level. This not only reflects the above proved sound working capital management, but also reflects the low debt policy of Hero Honda. The Long term Debt of Hero Honda for 03-04 is Rs 175crore whereas that of Bajaj has touched the sky high limit of Rs 1006 crore. It shows that Hero Honda is also not using its 2nd source of finance,i.e. Long term Debt. Thus it clearly shows that Hero Honda’s major source of finance is its current liabilities, which stood at Rs 1260.05crore which not only exceeds its current liability, but is also very close to crossing its figure of capital employed. This is a breathtaking fact, which shows the company is financing its fixed assets from its current liabilities. This can be risky as the company might face short term liquidity crisis in future. But the company is following with this because of its control over sundry debtors, whereby its able to realize funds from debtors at a very short notice.The above analysis gives us a light as to why Hero Honda is able to maintain its dominance in 2 wheeler segment for such a long period.

red to that from sale of goods.

Page 18: Dupont Analysis

The data used to calculate all the ratios used in DU PONT chart are shown below.

DATATVS BAJAJ

2002-03 2003-04 2004-05 2002-03 2003-04 2004-05SALES 2704.53 2820.21 2875.91 4159.08 4755.17 5736.35PBIT 203.97 215.74 201.24 789.71 961.33 1087.07TA 1069.35 1281.13 1521.98 6193.93 7148.23 8295.19FA 532.67 704.18 770.48 1298.22 1232.07 1140.83CA 448.76 436.03 506.65 2155.13 2053.04 2589.74CE 539.79 676.09 769.33 1523.34 966.72 940.65OF 422.95 574.95 678.83 3240.6 3693.62 4134.34LTL 121.89 119.01 186.84 840.22 1005.72 1226.99COGS 1858.68 1855.17 1981.42 2692.75 3199.22 4102.08EXP 583 705 683 806.52 888.58 931.43DEP 79.91 79.89 89.63 171.15 179.89 185.36INVENTORY 214.07 216.66 233.23 207.98 202.56 224.17DEBTORS 52.21 51.9 34.56 167.03 133.94 176.34CASH 82.46 18 73.87 30.02 79.37 108.68OTHER CA 0 0.19 0.29 59.44 45.48 68.53LOANS & ADV 100.02 149.28 164.7 1690.63 1591.68 2012.01

ANALYSIS

TVS has a lower ROCE mainly because of low operating profit (PBIT) and

comparatively higher capital employed. This has been the recent trend in past 3

years when TVS is trying to expand and hence incurring more cost on it, as a

result its non-trade investment is quite low as compared to other competitors who

have been operating in market for a quit long time.

PBIT/SALES is less for TVS mainly because of higher EXP/SALES as compared

to the industry average.

SALES/TA of TVS is more than the industry average mainly because of lower

Total-Assets, which in turn is due to lower Current-Assets.

SALES/CA is also quite high for TVS as compared that of Bajaj mainly because

of lower amounts of ‘OTHER CA’ and ‘LOANS & ADV’, or in other words, huge

SALES/OTHER CA and SALES/LOANS & ADV.

As explained earlier, Capital Employed of TVS is low mainly because it has low

Net Worth and it has raised lower amount of Long Term Loans when compared

with Bajaj.

Page 19: Dupont Analysis