Fundamentals of Corporate Finance - Term Paper Example

DuPont Analysis of AgroproquimDuPont analysis contains three major factors which take the substantial factors such as net profit margin, asset turnover, and financial leverage. Net profit margin is itself an indicator of profitability of the firm. Asset turnover is the measure of operating performance of the company indicating how much sales is generated by deploying $1 in total assets. Financial leverage indicates the risk position of the company such that it describes how much assets (in times) are financed through equity.

When all these three areas are joined together, they provide the return on equity i.e. the percentage of return earned by the shareholders of the firm through equity (Brealey, Myers, Marcus 2012). Following is the formula of return on equity through DuPont decomposition:Return on Equity = Operating Efficiency x Asset Use x Financial LeverageROE=Net ProfitXSalesxTotal Assets  Sales Total Assets Equity 200620072008Return on Equity13.69%13.98%16.20%Operating Efficiency2.36%2.10%1.91%Asset Use2.622.11.

55Financial Leverage2.213.185.44 Analysis of Return on EquityFrom the above calculations, it can be noticed that the overall return on equity of the company has experienced a mild increase such that it climbed up to 16.20% in 2008 from 13.69% in 2006. Major factor which boosted such increase in ROE is the rising financial leverage despite of the fact that the net profit margin and asset turnover of the company have declined. Thus, it can be concluded that the increase in both net income and equity in all the three years have effectively contributed in the higher return equity ratio of the company.

Analysis of Operating PerformanceThe operating performance of the company is demonstrated by net profit margin. The net profit margin of the company has decreased from 2.36% to 1.91% in the period ranging from 2008-08. Although, the net income of the company has increased considerably, however, net sales of the company, has increased more than that of net income yielding in lower net profit margin.Analysis of Asset UseDue to heavy increase in the total assets of the company, the total asset turnover of the company remained quite low as the total assets could not generate the similar level of sales.

In three years’ time, asset turnover of the company has reduced from 2.62 times to 1.55 times.Analysis of Financial LeverageFinancial leverage of the company has increased significantly because of the increase in total assets and stable equity position of the company. It experienced an increase from 2.21 times to 5.44 times in these three years which is more than double, contributing significantly in the overall return on equity of the company.ReferencesBrealey, R., Myers, S.C. & Marcus, A.J. (2012).

Fundamentals of Corporate Finance. New York: McGraw-Hill.