Management Making the Decision by DuPont Analysis
Author:
Univ. Prof. Ion STANCU, Ph. D.; Univ. Prof. Dumitra STANCU, Ph. D.
JEL:
G32, D22, L25
DOI:
Keywords:
company’s performance, return on assets (ROA), return on equity (ROE), DuPont system, profit margins, assets turnover, debt leverage
Abstract:
DuPont analysis can identify the strengths and weaknesses of the company`s performance, respectively, internal factors of performance growth or threat. DuPont analysis is an analytical explanation of return on total assets (ROA) and return on equity (ROE) by two, respectively three factors: profit margins, assets turnover and debt leverage of the company. This analysis allows to better understand the sources of return higher (or lower) of companies in similar industries or different industrial sectors.\r\nThis research is a continuation of the empirical study on the determinants of financial performance of the company - DuPont System, published in the "Financial Audit" Journal no. 7/2013. To make comparisons on the prevalence of some of the two factors ROA, respectively three factors ROE (mentioned above), are first analyzed the median results of these factors in the industries of companies listed on the Bucharest Stock Exchange.\r\nFor homogeneity of research variables, was then analyzed the DuPont system on four pharmaceutical companies ("A", "B", "Z" and "R"), listed on the Bucharest Stock Exchange. This analysis reveals the prevailing levers that one or another company has used to increase economic performance (ROA) and financial performance (ROE). Companies are identified (such as company "B") whose main advantage is profit margin as a result of market strategy, bringing new products to sell in a wide range and high profit margins. There are companies (such as the company "R") that obtain high asset turnover by adopting a strategy of economies of scale, i.e. selling products commonly required by the market, with low profit margins but high volumes of sales achieved by the endowment assets.\r\nWhat significantly differentiates financial performance (ROE) of the four companies is debt leverage. So are companies (such as, again, the company`s "R") that acted on the line attraction substantial bank loans to finance operating activities at a debt cost lower than theirs return on assets.\r\n