Lehman vs.

Microsoft
Safa Mahzari

In order to further understand a companys underlying drivers an analyst may conduct a DuPont
Analysis. There are three ways a firm creates returns: profit margin, asset turnover, and leverage.
This example will compare 2007 SEC 10-K filings from Lehman Brothers Holdings Inc. to that
of Microsoft Corporation. First, the DuPont Formula will be introduced; next, the numbers for
Lehman and Microsoft will be prepared; and last, a brief comparison will be made.

DuPont Formula
Return on Equity = Return on Assets x Equity Multiplier
Return on Equity = (Profit Margin x Total Asset Turnover) x Equity Multiplier

To clarify, Return on Asset (ROA) is the product of Profit Margin (PM) multiplied by Total Asset
Turnover (TAT); they are used interchangeably in this paper

DuPont Analysis, Lehman 2007
ROE = (PM x TAT) x EM
ROE = (0.071 x 0.085) x 30.728
ROE = (0.006) x 30.728
ROE = 0.1844
ROE = 18.44%

The DuPont Analysis helps shed light on Lehmans business operations in 2007. With slim profit
margins and slow turnover, the firms Return on Asset (ROA) is only 0.6%. To compensate for
this, Lehman is leveraged at 30:1. Analysts often mistake leverage as a driver of returns; more
accurately, leverage is a driver of volatility. Leverage proportionally exaggerates both positive
and negative situations.

DuPont Analysis, Microsoft 2007
ROE = (PM x TAT) x EM
ROE = (0.275 x 0.809) x 2.031
ROE = (0.222) x 2.031
ROE = 0.4508
ROE = 45.08%

The Analysis for Microsoft unveils a completely different corporate structure. Microsoft has
much higher profit margins, nearly 28%, and nearly ten-times quicker asset turnover. This leads
to a ROA of 22.2%. With an ROA that is 37 times higher than Microsoft demonstrates how
MSFT can employs its assets more efficiently than Lehman. Microsofts advantage comes from
utilizing its intellectual property to drive returns in both the hardware and software industries.
Further, Microsoft is leveraged at a much safer 2:1 ratio. Lastly, it is important to remember that
Microsoft is one of only four private companies whose debt is rated AAA by Fitch Ratings.



Deconstructed DuPont Analysis

Table 1: Operations

Table 1 shows the operations of Lehman Brothers and Microsoft, and the difference between the
two companies. In addition to having an asset turnover that is nearly ten times faster, Microsoft
has a profit margin that is 287% higher than Lehman. This break down shows how Lehmans
operations were struggling in 2007.



Table 2: Financing

Table 2 shows how the firms management made financial decisions. The change from ROA to
ROE reflects the amount of leverage a company has taken on. The surprise is that Lehman is
leveraged 30:1. While this amount of leverage does raise their returns substantially, it is not a
sustainable business model. For comparisons sake, if Microsoft was as heavily leveraged as
Lehman Brothers, their ROE would be 682%.



















Lehman Brothers Microsoft Delta
Profit Margin 0.071 0.275 (0.204)
Asset Turnover 0.085 0.809 (0.724)
Return on Assets 0.006 0.222 (0.216)
Lehman Brothers Microsoft Delta
Return on Assets 0.006 0.222 (0.216)
Equity Multiplier 30.728 2.031 28.697
Return on Equity 0.1844 0.4508 (0.2664)
Supplemental Data

Lehman Brothers Holdings Inc., reported in millions

Total Revenue: $59,003
Net Income: $4,192
Shareholders Equity: $22,490
Total Assets: $691,063

Source: http://www.sec.gov/Archives/edgar/data/806085/000110465908005476/a08-
3530_110k.htm




Microsoft Corporation, reported in millions

Total Revenue: $51,122
Net Income: $14,065
Shareholders Equity: $31,097
Total Assets: $63,171

Source: http://www.sec.gov/Archives/edgar/data/789019/000119312507170817/d10k.htm