Financial management principles and practices

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