Dupont Analysis Template

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Permalink Reply by Brent Wheeler on February 8, 2009 at 3:53am

Having done your DuPont analysis (and indeed the whole point) you may want to ask how you can improve things - or how the company might improve things. One way companies seek to improve returns is by growing - which typically requires capital.

There are generally two sources of capital - internally generated funding which comes from retained earnings and external which means raising capital by rights issue, or a share issue or some other method.

Deciding which to use depends a lot on the potential for growth which comes from different retained earnings policies (and therefore by implication the companies dividend policy). It helps to know what the internal growth rate is going to be for a given retained earnings level.

We know that this rate is equal to RE divided by Assets but it helps to understand what is going on (and where the growth comes from) to break it down into simple parts.... like this:

Internal Growth Rate = RE / Net Income * Net Income / Equity * Equity / Assets

Those three "division" entities tells us performance comes from:

1. Amount of RE plowed back into the firm
2. The ROE being achieved, and,
3. The leverage being used

So achieving different performance with these will alter the potential growth achievable with "internal funds".

I have made up the simplest of spreadsheets for fiddling with the parameters in the equation and different RE policies so you can see the impact on internal growth rates. The parameters to change to see effects are marked in yellow. To alter leverage, change the asset value (rather than equity).

This is all very simple - and you may think "too obvious". I find that frequently if we were better at "simple" and less concerned with trying to be too clever we would make better corporate finance decisions!!

Attachments:

• Internal Growth Rate.xls, 20 KB

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Permalink Reply by pradeep gupta on May 10, 2009 at 5:20am

sir you commented in the begining of the discussion that to improve returns " the company should grow". i agree with you but with growing your cost associates with also grow. so how can you exactly say that retruns can be improved by growing

thanks
pradeep

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Permalink Reply by Brent Wheeler on May 10, 2009 at 6:18am

I guess I would look to three "types" of growth - and you are quite correct to point out that we should be careful what we mean by growth in this context:

1. Growth in margins. If we can drive down per unit costs or drive up per unit revenues or both then we may be able to improve margins which will improve the spread between return and cost of capital and thus value.
2. absolute profit may be increased through increased volumes of through put, sales etc even where margins remain the same. Size for size sake is not a worthy objective however size may drive down risk by spreading risk across different geographies, possibly sectors and creating depth
3. Some combinations of both.

The most important point in your remark - which I agree with entirely - is that it is "net growth" we must look to.

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Permalink Reply by Ignacio Vélez Pareja on March 9, 2009 at 6:09pm

Daniel

You have been doing a great work with all those templates. Thanks and congratulations.

A comment: many financial ratios and in particular Dupont Analysis have to be done taking into account previous year data. For instance:

Return on Equity = Net Incomet/Equityt-1
Dupont = Return on Equity = Net margin * Total Assets turnover * Total Assets/Equity
= (Net Incomet/Salest)*(Salest/Total Assetst-1)*(Total Assetst-1/Equityt-1)
Return on Assets = EBITt/Total Assetst-1.

The rationale of this is the following:

Assume you have invested 1000 at year 0 and at year 1 you receive 1300. Would you calculate the return (IRR) as 300/1300 = 23.1% or 300/1000 = 30.0%? I am sure that you would say 30% and not 23.1%.

Well, when you calculate Return on Equity as Net Incomet/Equityt it is equivalent to have said that in the previous example the return is 23.1%. I know that it is a widespread practice but ...

Keep up the good work

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Permalink Reply by Rajaram on April 4, 2009 at 1:51am

Hey Daniel

Thanx a ton for the template. :)

rajaram

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Permalink Reply by Rajesh Singh on May 6, 2009 at 6:58am

Hi,

There is some problem with the link because i am not able to download it.

Regards
Rajesh

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Permalink Reply by Brent Wheeler on May 7, 2009 at 7:15am

Here it is again.... try this.

Attachments:

• DupontAnalysis.xls, 37 KB

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Permalink Reply by Amit Gupta on May 28, 2009 at 1:05pm

i m not able to download the sheet

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Permalink Reply by Eric Davio on January 26, 2010 at 11:22pm

wow... this is fantastic... thanks for posting this!

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Permalink Reply by Richa Chopra on May 9, 2009 at 11:15am

Hey please help me... i m unable to dowload this spreadsheet

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Permalink Reply by Brent Wheeler on May 9, 2009 at 5:39pm

If you can't download this one... you might try Daniel's one at the top of this thread. As far as I am aware they both work.

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Permalink Reply by Brent Wheeler on May 9, 2009 at 5:40pm

In fact just tested them and both work for me.... perhaps your browser is blocking the download?

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