Project Report: Finance

Running Head: Finance
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Project Report: Finance

Finance
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Contents
Introduction.......................................................................................................................3
DuPont analysis................................................................................................................3
DuPont analysis of four major banks of Australia............................................................5
Analysis of ROE...............................................................................................................7
Trend of ROE in next few years.....................................................................................11
Conclusion......................................................................................................................11
References.......................................................................................................................12

Finance
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Introduction:
DuPont formula is a technique to assess return on equity of a company. It breaks the
process into 5 parts. The name of this process has come from DuPont Corporation which has
started using the formula initially in 1920s. The report explains about the return on equity of
top 4 banks of Australia. AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD,
COMMONWEALTH BANK OF AUSTRALIA, WESTPAC BANKING CORP and
NATIONAL AUSTRALIA BANK LTD’s return on equity has been evaluated on the basis of
DuPont analysis and it has been found that the Roe of which bank is highest and what would
be trend of ROE in next few years in the Australian market.
DuPont analysis:
DuPont analysis offers a broad knowledge about the return on equity of an
organization. It ensures and highlights the main power and strengths and at the same time in
pin points the main area of company where improvements are required to be done. DuPont
analysis makes it easy for the comapny to find out the main reason behind lower ROE (Little
et al, 2011). It measures that whether the lower profit margin is the reason behind the lower
ROE or the return on assets of the company. Once the organization finds out the main area
due to which the ROE is getting lower, few steps could be taken by the company to improve
it and make it better. The DuPont formula is mainly based upon the following ratios:

Finance
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Figure 1: DuPont Analysis
(Clark et al, 2009)
Return on equity:
Return on equity offers the useful insight about the performance of the company.
Return on equity could easily be compared with the different companies and a better decision
could be made by the investors about the investments. Return on equity is calculated on the
basis of total profit of the company and the equity level of the company. The more the equity
of an organization would be the less the Return on equity would be. It briefs that the comapny
should manage the equity according to the equity level of the company. The formula of return
on equity is as follows:
Return on equity = Net income / Equity (Liesz & Maranville, 2008)
Though, the DuPont formula briefs that the return on equity of an organization is the
combination of leverage multiplier, asset utilization and net profit margin of the company.
Return on equity calculations on the basis of DuPont analysis makes it easy for the comapny
to find out the main reason behind lower ROE. It measures that whether the lower profit
margin is the reason behind the lower ROE or the asset utilization of the company.
Leverage multiplier:
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)