DuPont Analysis

DuPont analysis is a good way to analyze what fundamental factors drive changes in firm profitability.

1. Select five firms and retrieve their financial statements from finance.yahoo.com or another site that has financial information.
2. Perform a DuPont analysis of return on equity (ROE) for each of the selected firms by setting up a spreadsheet to calculate the relevant ratios. Multiply the ratios as appropriate to find ROE, then enter the ROE formula directly (ROE = Net Profit / Equity) to confirm your work.
3. Calculate the compound leverage factor for each firm.
4. For each firm, identify areas of strength and areas of weakness. State two specific things the firm can do to improve its ROE.
5. A less detailed DuPont decomposition of ROE is available at www.credit-to-cash-advisor.com/document_120.html. You may explore this calculator by entering inputs directly from the financial statements.

Financial Statement Analysis

Use the moneycentral.msn.com/investor site to research the stocks of Kraft Foods (KFT) and Sara Lee (SLE). Look in the financial results area to find the key ratios for each firm. Copy the indicated ratios into a spreadsheet and produce the charts described below.

1. Plot the following ratios for both firms and the industry on one column chart: 5-year annual average sales growth rate, 5-year annual average net income growth rate. Which firm is growing faster? How do the firms' growth rates compare to the industry's growth rates?
2. Plot the net profit margins for both firms and the industry on another column chart. How do the firms' profit margins compare to each other and to the industry average?
3. Plot the firms' and the industry's current and quick ratios on a third chart. Analyze the firms' liquidity status.
4. Look at the firms' return on equity ratios, both the ones for the current year and the 5-year averages. Compare them to each other and to the industry average to see how the firm's investments are faring.
5. Record the receivables turnover, inventory turnover, and total asset turnover ratios for the firms and for the industry. How efficiently are the managers using these assets?
6. Click on the Research Wizard on the left-side menu and select the Comparison sub-menu to compare Kraft and Sara Lee. What items do you see that have not been previously considered but might be important in judging the financial health of the firms?
7. If you want to add one of the stocks to your portfolio, which one would you choose?