Commercial Banking and Finance: DuPont Analysis and Industry Evaluation

Running Head: Commercial Banking and Finance
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Project Report: Commercial Banking and Finance

Commercial Banking and Finance 2
Contents
Introduction.......................................................................................................................3
DuPont analysis................................................................................................................3
Return on equity...........................................................................................................4
Leverage multiplier.......................................................................................................4
Return on assets............................................................................................................5
Asset utilization............................................................................................................5
Net profit margin..........................................................................................................5
Calculations of DuPont analysis.......................................................................................6
Analysis of bank industry of Australia.............................................................................7
Return on equity...........................................................................................................7
Leverage multiplier.......................................................................................................8
Return on assets............................................................................................................8
Net profit margin..........................................................................................................9
Asset utilization..........................................................................................................10
Prediction about Australian Bank industry’s ROE.........................................................11
Conclusion......................................................................................................................11
References.......................................................................................................................12

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Introduction:
The report has been prepared t evaluate the current performance of Australian bank
industry. In the report four main banks of Australia has been evaluated and the study has been
conducted on the DuPont analysis. The study explains about the industry position in last 5
years as well as it concentrates on the future trend of the Australian banking industry. In the
report, firstly, DuPont has been studied and it has been evaluated that how this model works
in an organization. Further, the 4 banks of Australia have been evaluated and the return on
equity of all the 4 banks has been calculated. Lastly, the analysis of last 5 years has been done
as well as future changes into the return on equity of the industry have also been measured.
DuPont analysis:
DuPont analysis is a way to calculate the return on equity of an organization. It
evaluates the net profit margin, financial leverage and assets turnover of an organization and
measures the total return in equity of an organization. DuPont method has been used by the
DuPont Corporation firstly; the main motto behind this analysis is to evaluate the reason
behind lower ROE. In this model, the return on equity is evaluated on the basis of total assets,
total equity, sales revenue, net profit etc of the company and it is measured that which factors
is impacting on the return on equity of an organization. The main components of return on
equity are as follows:
Figure 1: DuPont Components
Return on equity (Net income / Equity) =
Leverage Multiplier (Total Assets / equity)*
Return on assets (Net income /Total assets) =
Asset Utilization (Revenue / Total assets) *
Net profir margin (Net income / revenue)

Commercial Banking and Finance 4
(Arnold, 2013)
The DuPont components brief about the return on equity which is calculated on the
basis of leverage multiplier and the return on assets of the organization. On the other hand,
the return on assets could be calculated on the basis of asset utilization and net profit margin.
The explanation of each component is as follows:
Return on equity:
Return on equity is an investment ratio which evaluates that how much profits are
generated by the company on the basis of its equity. It explains that how much could be paid
by the company to its shareholders. The return on equity of various companies could be
evaluated by the investors to make a better choice of investment companies. Return on equity
explains that the better the ratios of return on equity is the better the investment position of an
organization would be. Formula of return on equity of the company is as follows:
Return on equity = Net income / Equity (Lord, 2007)
In DuPont analysis, return on equity is the main outcome of the analysis. The model
evaluates the position of the company on various factors. In DuPont analysis, the formula of
return on equity is as follows:
Return on equity = (Total assets / total equity) * (Revenue / total assets) * (Net income / total
revenue)
It explains that the few changes into the above factors would directly make an impact
on the return one equity position of an organization.
Leverage multiplier:
Leverage multiplier is a structure ratio which evaluates that how much assets are hold
by the company on the basis of its equity. It explains that how much assets should be
maintained by the company to lower the risk position and the performance of the company.
The leverage multiplier of an organization could be evaluated on the basis of its industry by
the investors to make a better choice of investment companies. Leverage multiplied explains
that the better the ratios of leverage multiplier is the better the investment position of an
organization would be. Formula of leverage multiplier of the company is as follows:
Leverage multiplier = Total assets / total equity (Madhura, 2011)