DuPont Chart

Income Statement

Sales

Gross Profit

Other Income
Earnings
before Net Profit EBIT EBIT on
interest Assets
& taxes (EBIT)
COGS

Sales Total Assets

Operating
Interest Paid
G&A Expenses

Profit Margin

Taxes Return
Depreciation on Equit
y

Other Expense

Assets

Cash

Sales
Receivables Assets
Fixed Assets Turnover

Total Assets
Inventory

Current
Assets
Working
Other Assets
Capital

Current
Liabilities

Liabilities & Equity

Payables
Current
Liabilities

Total
Notes Payables Liabilities
Total Leverage
Non-Current
Liabilities

Other Liability

Capital
Beginning
Ending Net Worth
Net Worth

Retained
Earnings
DU Pont Analysis

The Du Pont Company of the US pioneered a system of financial analysis, which has received widespread recognition and acceptance. This system
of analysis considers important interrelationships between different elements based on the information found in the financial statements.

The Du Pont analysis can be depicted via the following chart:

At the apex of the Du Pont chart is the Return On Total Assets (ROTA), defined as the product of the Net Profit Margin (NPM) and the Total Assets
Turnover Ratio (TATR). As a formula this can be shown as follows:

(Net profit/Total asset)= (Net profit/Net sales)*(Net sales/Total assets)

(ROTA) (NPM) (TATR)

Such decomposition helps in understanding how the return on total assets is influenced by the net profit margin and the total assets turnover ratio.

The left side of the Du Pont chart shows details underlying the net profit margin ratio. A detailed examination of this side presents areas where cost
reductions may be effected to improve the net profit margin.

The right side of the chart highlights the determinants of total assets turnover ratio. If this study is supplemented by the study of other ratios such as
inventory, debtors, fixed asset turnover ratios, a deeper insight into efficiencies and inefficiencies of asset utilisation can be sought.

The basic Du Pont analysis can be extended to explore the determinants of the Return On Equity (ROE).

Return on equity= Asset turnover * Net profit margin*leverage

(Net profit/Equity)= (Net profit/Sales)*(Sales/Total assets)*(Total assets/Equity)

(ROE) (NPM) (TATR) 1/(1-DR)

Where DR is the debt ratio= debt (D)/assets (A)

Breaking ROE into these three parts allows evaluation of how well one can manage the company’s assets, expenses, and debt. A manager has
basically three ways of improving operating performance in terms of ROA and ROE. These are:

• Increase capital asset turnover

• Increase operating profit margins
• Change financial leverage

Each of these primary drivers is impacted by the specific decisions on cost control, efficiency productivity, marketing choices etc.

Importance of Dupont Analysis

Any decision affecting the product prices, per unit costs, volume or efficiency has an impact on the profit margin or turnover ratios. Similarly any
decision affecting the amount and ratio of debt or equity used will affect the financial structure and the overall cost of capital of a company.
Therefore, these financial concepts are very important to evaluate as every business is competing for limited capital resources. Understanding the
interrelationships among the various ratios such as turnover ratios, leverage, and profitability ratios helps companies to put their money areas where
the risk adjusted return is the maximum.

Dupont Analysis

DUPONT Analysis of Some Selected Indian

Companies

DUPONT Analysis of RONW

RONW
Ashok Leyland
PAT/NW

Asset Turnover Asset Leverage

Profit Margin
SALES/ TOTAL TOTAL ASSETS/
PAT/ SALES
ASSETS NET WORTH

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

ROCE

PBIT/CE

Asset Turnover Asset Leverage

Profit Margin
SALES/ TOTAL TOTAL ASSETS/
PBIT/ SALES
ASSETS CE

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

ROTA

PBIT/TA

Turnover Current Asset

Operating Profit
Leverage
Revenues/Total
PBIT/ Revenues
Asset Sales / CA

DUPONT 2004-05 2003-04 2002-03

ROTA 15.9% 17% 10.1%

Turnover 125.8% 134.7% 143.5%

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.

ROTA
2004 -

ROTA =
PBIT /
Total
Asset

0.1311

Sales /
Total Asset
PBIT / Sales

0.7638
0.1895

Expenses /
COGS / Sales Dep.n /
Sales / FA Sales / CA
Sales Sales

0.1624
5.0284 2.2151
0.7151 0.0323

Sales /
Salary / Sales / Inventory
Sales / Cash
Sales Debtors

25.5861
52.8214
0.0434 32.5377
 2003 -
ROTA =
04
PBIT /
Total

Asset

0.1345

Sales /
PBIT /
Total
Sales
Asset

0.2022
0.6652

COGS / Expenses
Dep/ Sales Sales / FA Sales / CA
Sales / Sales

0.0378 3.8592 2.3162

0.6728 0.1869

Salary / Sales / Sales / Sales /

Sales Debtors Cash Inventory

0.0506 35.513 59.8892 23.4709

 ROTA = 2002 -
PBIT / 03
Total Asset

0.1275

Sales / Total
Asset
PBIT / Sales

0.6715
0.1899

COGS / Expenses /
Dep / Sales Sales / FA Sales / CA
Sales Sales

0.0411 3.2037 1.9299

0.6475 0.1939

Salary / Sales / Sales /

Sales / Cash
Sales Debtors Inventory

138.6367
0.0572 24.9048 19.9957

ROCE 2004 - 05

ROCE 2002 - 2003

 T A C h ar t
80000
75100
70000 71482

61939
60000

50000

40000

30000

20000

10000

0
2004- 05 2003- 04 2002- 03
TA ( m n)

RONW 2004 - 05

RONW 2003 -
2004
DRL
DuPont 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.

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
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
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 – 2005

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 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 - 2005
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 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

8.0.2 Return on Capital Employed
8.0.3 Return on Total Asset
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.

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

TVS BAJAJ
DATA
2002-03 2003-04 2004-05 2002-03 2003-04 2004-05

SALES 2704.53 2820.21 2875.91 4159.08 4755.17 5736.35

PBIT 203.97 215.74 201.24 789.71 961.33 1087.07

TA 1069.35 1281.13 1521.98 6193.93 7148.23 8295.19

FA 532.67 704.18 770.48 1298.22 1232.07 1140.83

CA 448.76 436.03 506.65 2155.13 2053.04 2589.74

CE 539.79 676.09 769.33 1523.34 966.72 940.65

OF 422.95 574.95 678.83 3240.6 3693.62 4134.34

LTL 121.89 119.01 186.84 840.22 1005.72 1226.99

COGS 1858.68 1855.17 1981.42 2692.75 3199.22 4102.08

EXP 583 705 683 806.52 888.58 931.43

DEP 79.91 79.89 89.63 171.15 179.89 185.36

INVENTORY 214.07 216.66 233.23 207.98 202.56 224.17

DEBTORS 52.21 51.9 34.56 167.03 133.94 176.34

CASH 82.46 18 73.87 30.02 79.37 108.68

OTHER CA 0 0.19 0.29 59.44 45.48 68.53

LOANS & 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.