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Financial Management: DuPont Analysis
The DuPont analysis I conduct below will come in handy in the determination of how Wal-Mart and Target are achieving their Return on Equity (ROE). According to Baker and Powell (2009), the DuPont analysis formula can be presented as:
Return on equity = Profit margin * Total asset turnover * Equity multiplier
DuPont Model
Wal-Mart
Target
Net Profit Margin
Asset Turnover
Equity Multiplier
Return on Equity
In regard to Wal-Mart, the increase in ROE was largely as a result of an increase in the asset turnover and equity multiplier. Similarly, the increase in ROE in the case of Target was as a result of an increase in the equity multiplier and asset turnover. Taking into consideration the ROE of both companies, it is clear that the stockholders of Wal-Mart are racking in more profits for each dollar invested in the company. Target however seems to rake in more profits than Wal-Mart per every revenue dollar. This can be gleaned from the net profit margins of both companies. Target's high equity multiplier on the other hand clearly demonstrates that in comparison to Wal-Mart, Target is more aggressive in the utilization of debt to finance its assets. In the words of Gallagher and Andrew (2007), "the equity multiplier indicates the amount of financial leverage a firm has." In regard to asset turnover, Wal-Mart seems more efficient than Target in the utilization of assets to generate revenues.
Part 2
Common size analysis completed using a spreadsheet.
Discussion
From the analysis, several conclusions can be drawn. For instance, Wal-Mart should consider reducing its cost of revenue. This is more so the case given that in comparison to Target, a significant chunk of Wal-Mart's total revenue is 'shaved-off' by the said costs/expenses. From the analysis, it is also clear that Target's net income in relation to total revenues is significantly higher than that of Wal-Mart. In that regard, Wal-Mart should consider reducing its expenses so as to enhance its bottom line.
References
Baker, H.K. & Powell, G. (2009). Understanding Financial Management: A Practical Guide. Malden, MA: Blackwell Publishing.
Gallagher, T.J. & Andrew, J.D. (2007). Financial Management: Principles and Practice (4th ed.). Minnesota: Freeload Press.
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