Question

Interpret, explain, evaluate deeply these trends for a bank resulting from DuPont Analysis:

1. equity multiplier increase than decrease

2. Profit margin drastically decrease than slightly increase and then decrease again

3. Asset utilization slightly decrease increase and them decrease again

Answer 1

1. Equity multiplier : Assets / Equity

The equity multiplier is the amount of the firms assets that are financed by the shareholders equity. The higher this ratio indicates that the company has a greater reliance on debt rather than on equity. A company should prefer a lower equity multiplier ,as lower multiplier means lower debt which would lead to lower servicing costs. The equity multiplier decreasing, indicates that the equity is higher  and the assets are financed with higher equity so debt is falling.

2. The profit margin is Net income / Sales

This indicates the volatility of the net income. The decreasing of the profit margin, then increasing and then decreasing depicts that the net profit is volatile and is continuosly changing.

3. The asset turnover ratio : Sales/ Assets

The asset utilization decreases , then increases and then decrease again shows that the assets were not properly utilized to generate higher sales, then the assets were utlized proeprly and then again under utilization of the asssets took place.