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Analysis of ROA and ROE
What recommendations can our group give Jill Keyes regarding her objectives to know the fundamental differences on the companies’ financial results and to incorporate their techniques in generating ROE in her own company?
The Financial Cockpit:
Three Levers and One Flight Plan
Conclusion & Recommendation
Use appropriate ROE generation techniques based on the computations
design by Dóri Sirály for Prezi
Definition of Terms
Return on Sales/Net Profit Margin
Jill Keyes, CFI Company
Analyze ratios of other companies using DuPont
Incorporate ROE strategies
Time frame: 2009
Net Income / Sales
Sales / Total Assets
Return on Assets (ROA)
Net Income / Total Assets
Return on Sales x Asset Turnover
Total Assets / Total Equity
Return on Equity
Net Income / Total Equity
ROA x Financial Leverage
ROS x ATO x Financial Leverage
ROE is broken down into 3 components
Uses both Income Statement and Balance Sheet information
ROS, Asset Turnover, Financial Leverage
Which of the nine companies used its assets most productively?
Asset Turnover - Better measure than ROA
Winner: Dell - Asset Intensive type of business
Which of the companies used debt most aggressively in financing its operations?
Measure using Financial Leverage
Which company’s ROE would be the most attractive to investors, and how was it generated?
Used assets efficiently, relied on debt financing
Leads the companies in these 2 aspects
Which company changed the most in how it generated ROE results from investors from Year 1 to Year 5?
Winner : Apple
Big improvement in ROS
Slight decline in Asset Turnover
Did any of the companies change for the worse in how it generated ROE results for investors from Year 1 to Year 5?
Losers: Procter & Gamble and Yahoo!
P&G : Asset Turnover and Financial Leverage decreased.
Yahoo! : ROS dropped significantly
What were the ratio amounts, for the same nine companies in years subsequent to Year 5, and what insights did those additional data offer?
Yahoo! and HP - significant changes
Yahoo! - ROS increased suddenly in 2012
HP - ROS became negative
Company in the same industry as CFI: IKEA
What other data and sources of information would be important to tap into in order to more fully flesh out the story depicted by these DuPont ratio amount and trends?
Gathering data of the ratios of companies belonging in the same industry would be useful because Jill will be able to observe the trends and compare it with those of her own company
Were there other companies that should be reviewed to help evaluate CFI more fully and to help grasp the varied way(s) other companies generated ROE results for their investors?
Ratio averages for different industries