04-10-2012, 12:50 PM
Net Leverage Multiplier Replacing DuPont Analysis
Net Leverage Multiplier.doc (Size: 298.5 KB / Downloads: 29)
Abstract:
The three-tier analysis or Du-Pont Chart is an important tool for internal and external improvement in the operations of business activities. This has three tier i.e. assets turnover, profit margin and financial leverage. The DuPont Model is a technique that can be used to analyze the profitability of a company using traditional performance management tools. To enable this, the Du Pont model integrates elements of the financial statements (that are Income Statement) with those of the Balance Sheet. A Du-Pont Chart is the inter relationship between various ratios in the form of charts for better managerial control. The standard ratios of the company are compared to present ratios and changes in performance are judged.
This paper tries to find out whether the assets are properly utilized or not, and whether the company has the earnings which are sufficient or not as per their investment with the help of Net leverage Multiplier replacing the dupont analysis
Origin of the DuPont Model
The DuPont model of Financial Analysis was made by F. Donaldson Brown, an electrical engineer who joined the giant chemical company’s Treasury department in 1914 . A few years later, DuPont bought 23% of the stock of General Motors Corp. and gave Brown the task of cleaning up the car maker’s tangled finances. This has perhaps the first reengineering efforts in USA .Much of the credit of GM’s ascension afterward belongs
to the planning and control system of Brown, according to Alfred Sloan, GM’s former Chairman. Ensuring success launched by DuPont model towards prominence in all major US corporations. It remained the dominant form of financial analysis until the 1970s.
The Chart indicates:
The earning power or the ROI ratio is a central measure of the overall profitability and operational efficiency of the firm. The Du Pont chart shows the interaction of profitability and activity ratios. It implies that the performance of a firm can be enhanced either by generating more sales with same amount of investment or by increasing the profit margin.
The left hand side of the Du Pont chart shows the details underlying the net profit margin ratio. To maximize Return on Assets we should increase sales price of our products. This will increase the net margin, which will in turn increase the return on assets. Increase in Net profit margin can also be achieved through cost-reduction. The right hand side of the Du Pont Chart throws light on the determinants of the total assets turnover ratio.
Total assets consist of fixed assets as well as current assets. The total turnover ratio depends how efficiently and effectively these assets are used. Therefore to increase this ratio, one should undertake measures like inventory control, cash flow management, receivable management, maintenance of fixed assets, etc. to use these assets optimally.
Optimum utilization of the assets will increase productivity and result in better sales performance in-turn influencing the assets turnover ratio. A company should have proper control on its inventory and debtors so as to ensure an efficient cash flow in the enterprise. An increase in the assets turnover ratio will increase the return on assets. This is the how ROI concept could be used for proper control using the Du Pont Chart.
Industry Perspective
The Indian Pharma Industry has been resilient to the economic challenges. Our Country is holding its ground in the midst of the current global financial crisis. The Indian economy is expected to emerge as the fastest growing economy by 2013 and to be the 3rd largest economy by 2050 (Source: BRICs Report, Goldman Sachs). The GDP growth will be driven by both exports and domestic consumption. The current spending on healthcare [public and private] is estimated at 6% of GDP and expected to increase to 10% of GDP by 2016. India is also emerging as a low-cost, high quality option for outsourcing of research, manufacturing and other services. This offers a great opportunity for the Indian pharmaceutical industry and Indian pharma companies.
The Global pharmaceutical Industry is witnessing a growing importance of generics. Global pharmaceutical market intelligence company IMS Health believes the Indian generic manufacturers will grow at a faster clip as drugs worth approximately $20 billion in annual sales will face patent expiry in 2011. In fact, with nearly $105 billion worth of patent-protected drugs to go off-patent (including 30 of the best selling US patent-protected drugs) by 2012, Indian generic manufacturers are positioning themselves to offer generic versions of these drugs. With drugs going off patent each year, generics represent a major outsourcing opportunity for pharmaceutical producers in India. The global pharmaceutical outsourcing market is rapidly growing.
Finance:
The Company has registered a consolidated total income of Rs.1140.77 Crores for the year under review as compared to Rs. 1120.16 Crores for the previous year ended on 31st March, 2009. The consolidated Profit, before providing for Interest, Depreciation, Non-recurring Income, expenses and Taxes, was Rs.116.88 Crores for the year under review as compared to Rs. 130.38 Crores for the previous year. The Company has made a consolidated profit after tax of Rs.39.54 Crores for the year under review, as compared
to Rs. 10.82 Crores for the previous year.