What is the DuPont System made up of?

It is made up of 3 different ratios 1. Net profit margin (NI/REV), 2. Asset Turnover Ratio (Rev/TA) 3. Leverage TA/SE

Why use the DuPont system

it breaks apart the ROE (NI/SE_ in order to get a better idea what affected the numbers. "decompose ROE"

why does the DuPont system provide a good starting point for any financial analysis?

shows that financial strength come from many sources. 1. profitability 2. asset utilization 3. leverage

What does financial leverage mean?

magnification of both profits and losses

What are the 3 major leverage ratios that relate to financial leverage?

1. stock ratio 2. flow ratio 3. other ratio *******

What do stock ratios indicate

the amount of debt outstanding a particular time

What are the stock ratios

1. leverage ratio 2. debt ratio 3. debt to equity ratio

What is the formula for the leverage ratio

total assets / shareholder's equity

what is the formula for debt ratio

total liabilities / total assets

What is the formula for debt to equity ratio

total debt / se

what does the debt ratio indicate

the proportion of total assets financed by debt a the balance sheet date

what does the debt-equity ratio mean

the proportion that total debt represents in relationship to SE (both common stock and retained earnings) at the balance sheet date

What are the income statement flow ratios

1. times interest earned (TIE) ratio 2. Cash flow to debt ratio

How do you calculate times interest earned ratio (TIE)

EBIT / Interest expense

How do you calculate cash flow to debt ratio

cash flow form operations / total debt

what does times interest earned ratio show

it shows the number of times the firm's pre-tax income (EBIT) exceeds its fixed financial obligations to its lenders

What does cash flow to debt ratio show

it measures how long it would take to pay off a firm's debt using cash flow from operations

What are the efficiency ratios

1. degree of total leverage (DTL) 2. break-even point 3. gross profit margin 4. operating margin

what do efficiency ratios measure

measure how efficiently a dollar of sales is turned into profits - gives insight into the company's cost structure - helps to determine if problems exist with either variable or fixed costs

how do you calculate the degree of total leverage (DTL)

CM / earnings before taxes

how do you calculate the break-even point

fixed costs / CM

How do you calculate gross profit margin

Revenue - COS / Revenue

How do you calculate operating margin

operating income / revenue

What does degree of total leverage measure

measures exposure of profits to changes in sales - the greater the DTL the greater the leverage effect

what does break-even point show

it estimates how much you need to sell in order to cover all costs (both fixed costs and variable costs) - usually increases as the use of fixed costs increases

what does gross profit margin show

shows the proportion of sales that are available to cover fixed period costs and financing expenses after variable costs have been paid

What does a declining gross profit margin mean

it raises concerns about the company's ability to control variable costs, such as direct materials and labour

what does operating margin measure

it measures the cumulative effect of both variable and period costs on the ability of the company to turn sales into operating profits and cover interest, taxes, depreciation and amortization (EBITDA)

What are the productivity ratios

1. receivable turnover ratio 2. average collection period (ACP) 3. inventory turnover ratio 4. average days sale sin inventory (ADSI) 5. fixed asset turnover

what do productivity ratios measure

the firm's ability to generate sales from its assets