Du Pont analysis is a performance measurement technique that has been followed since the time DuPont Corp first used it in 1920s. It breaks up the RoE of a company into three components namely net profit margin, asset turnover and equity multiplier. In this series of articles, we will evaluate the print media companies on the basis of the components of their RoE- the DuPont analysis. A step by step break up will help us understand why and how exactly is the RoE shaping up.
Return on Equity (RoE) is an important ratio to look at when deciding whether a company is able to generate wealth for shareholders. Simply put RoE = Net Profit/ Equity. But, a deeper look tells us it is much more than that. If broken into various components RoE can be expressed as:
The FY11 RoE for Jagran Prakashan, HT Media and DB Corp were 31.4%, 16.3% and 34.3% respectively. The DuPont analysis will reveal whether the higher return ratios are sustainable for Jagran Prakashan and DB Corp. While Net profit margin speaks about the operating efficiency; the asset turnover ratio gives an indication about how well are the assets being utilized. Equity multiplier tells us what is the leverage position implying what percentage of total assets is equity.
The first component of the Du Pont analysis is the net profit margin. The FY11 net profit margins of Jagran Praksahan, HT Media and DB Corp were 18.5%, 14.6% and 21.3% respectively. Here, DB Corp emerges as the winner.
Net profit itself is derived from operating profit. i.e. Net profit= Operating Profit - interest expenses - tax rate. So, let us look at the operating profit margins of all the companies. The operating margins of the companies are 27.7%, 22.1% and 30.4% respectively (in the same order as mentioned earlier). DB Corp seems to be doing well on this parameter as well. The operating expenses determine the operating profits. We will look at the operating expenses as a percentage of sales for all the companies in consideration and decide what has led to better operating performance by DB Corp.
There are mainly 3 operating cost drivers- raw material cost, employee cost, other operating expenses and selling and distribution (S&D) expenses. Considering these, we know that DB Corp has the lowest S&D and other operating expenses. The raw material and employee costs are similar for the 3 media companies. Jagran is the next best in operating performance with lower S&D and employee expenses. However, for HT Media, expenses as a percentage of sales are the highest for all the 4 cost heads. This surely reflects in the operating margins of these companies.
Interest expenses as a percentage of sales are the highest for HT Media (1.5%) which had a debt to equity ratio of 0.3 times in FY11. However, Jagran Prakashan (0.6%) is better on this parameter than DB Corp (1.2%). Taxes paid are as per the normal tax rates prevailing with locational advantages and loss making subsidiaries in consideration (for set off purpose). This does not necessarily reflect the operating efficiency of the companies.
We thus, get to conclude that based on net profit margin and all the underlying parameters, DB Corp seems to be doing well. In the next article, we will discuss the asset turnover of print media companies and their equity multipliers.
Courtesy:Equitymaster
By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.
Cookies Setting
By clicking “Accept All Cookies”, you agree to the storing of cookies on your device and the processing of information obtained via those cookies (including about your preferences, device and online activity) by us and our commercial partners to enhance site navigation, personalise ads, analyze site usage, and assist in our marketing efforts. More information can be found in our Cookies and Privacy Policy. You can amend your cookie settings to reject non-essential cookies by clicking Cookie Settings below.
Manage Consent Preferences
Strictly Necessary Cookies
These cookies are necessary for the website to function and cannot be switched off in our systems. They are usually only set in response to actions made by you which amount to a request for services, such as setting your privacy preferences, logging in or filling in forms. You can set your browser to block or alert you about these cookies, but some parts of the site will not then work or you may not be able to login.
Functional Cookies
These cookies enable the website to provide enhanced functionality and personalisation. They may be set by us or by third party providers whose services we have added to our pages. If you do not allow these cookies then some or all of these services may not function properly.
Targeting Cookies
These cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They are also used to limit the number of times you see an advert as well as help measure the effectiveness of an advertising campaign. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.
Performance Cookies
These cookies allow us to count visits and traffic sources so we can measure and improve the performance of our site. They help us to know which pages are the most and least popular and see how visitors move around the site. All information these cookies collect is aggregated and therefore anonymous. If you do not allow these cookies we may not know when you have visited our site, and may not be able to monitor its performance.