Order from us for quality, customized work in due time of your choice.
The DuPont analysis indicates that the company’s return on shareholders’ equity is affected by its operational efficiency, asset utilization, and financial leverage. The analysis assists management to identify weak areas of business. It also allows management to undertake corrective measures to improve the company’s weak areas and enhance its financial position. Shareholders, who are interested in the company’s ability to generate higher returns on their investment, use DuPont analysis in order to estimate future earnings’ potential of the business (Ross, Westerfield, & Jaffe, 2013). Graham, Harvey, & Rajgopal (2006) and O’connor, Priem, Coombs, & Gilley (2006) highlighted that CEOs often manipulate earnings figure to present falsified strong financial position of their companies. The DuPont expression is given in the following.
ROE = Operational Efficiency x Asset Utilization x Financial Leverage
ROE = Profit Margin x Asset Turnover x Equity Multiplier
ROE = Net Income / Total Sales x Total Sales/ Total Assets x Total Assets / Total Equity (Ross, Westerfield, & Jaffe, 2013).
For this report, the DuPont analysis of Wal-Mart Stoes Inc. was carried out. Moreover, the company’s performance was compared with its competitor i.e. Target Corporation. The financial data for the year ending 2013 was used for both companies. The table below provides the financial information used for performing DuPont analysis and its results.
Table 1: DuPont Analysis. Sources of data: Wal-Mart 2013 Annual Report (2014); Target Corporation – Annual Report 2013 (2014).
Figures are in ‘000s.
The results indicated that the operational efficiency of Wal-Mart was better than Target Corporation. The company generated higher net profit margin as compared to its competitor. It implied that the company’s sales generated higher profits for its shareholders than Target Corporation. Moreover, it could be indicated that both companies are part of a high turnover industry and they both have low net profit margins. Similarly, the utilization of the Wal-Mart’s assets was more efficient than Target Corporation. The company was able to generate sales revenue of $2.33 for every $1 invested in its assets. In comparison, Target Corporation only generated sales revenue of $1.63 for every $1 invested in its assets. It implied that Wal-Mart was more efficient than its competitor. In terms of financial leverage, it could be noted that Wal-Mart had lower equity multiplier value than Target Corporation. However, the difference between values of both companies was not significant. The results indicated that Wal-Mart had $2.69 of assets for every $1 of its equity. On the other hand, Target Corporation had $2.74 of assets for every $1 of its equity. The results also suggested that both companies financed a major proportion of their assets through debt rather than equity (Ross, Westerfield, & Jaffe, 2013).
The DuPont analysis indicated that the return on equity of Wal-Mart Stores Inc. was 21.01%. Its return on equity was higher than its competitor. The return on equity of Target Corporation was just 12.14%. The analysis concludes that Wal-Mart was more efficient in terms of generating higher profits from its operations and making better use of its assets than Target Corporation. Based on its efficiencies, Wal-Mart was able to generate higher returns for its shareholders in the year ending 2013.
References
Graham, J. R., Harvey, C. R., & Rajgopal, S. (2006). Value Destruction and Financial Reporting Decisions. Financial Analyst Journal, 62(6), 27-39.
O’connor, J. P., Priem, R. L., Coombs, J. E., & Gilley, K. M. (2006). Do CEO Stock Options Prevent or Promote Fraudulent Financial Reporting? Academy of Management Journal, 49(3), 483–500.
Ross, S.A., Westerfield, R.W., & Jaffe, J. (2013). Corporate finance (10th ed.). New York, USA: Mc-Graw Hill.
Target Corporation – Annual Report 2013. (2014). Minneapolis, USA: Target Corporation.
Wal-Mart 2013 Annual Report. (2014). Bentonville, USA: Wal-Mart Stores Inc.
Order from us for quality, customized work in due time of your choice.