22207 Study Guide - Final Guide: Profit Margin, Capital Structure
Document Summary
A dupont analysis provides insight into how a company"s return on equity was generated by decomposing the return into three components: operating efficiency, asset effectiveness and capital structure. Net profit/sales = profit margin (ability to earn profits from sales) *operating efficiency: high = more efficient in turning sales into profits. Sales/total assets = sales turnover (ability to generate sales from asset base) *effectiveness at using assets: high = more effective a company is in generating sales given its assets. Total assets/equity = leverage (highly leveraged, low equity, high assets) *capital structure: measures how a business finances its assets. *high = more debt than equity (more financial leverage, riskier capital structure) Kmart has high sales turnover and low profit margin (opposite for versace) 0. 020 (0. 07 x 1. 60 x 0. 18): profit margin went up by 2%. Discussion: financial ratios are just numbers, they don"t really tell you whats. * numbers alone don"t flag information due to diversity in industries.
