Component 1 – Ratio Analysis
Difficult Ltd. - DuPont
ROE = Profit after tax x 100 = 500 000 = 17,64%
Equity 1 2 835 000
=
ROA = Profit after tax x 100 = 500 000 = 9,53%
Total assets 1 5 245 000
x
Leverage = Total assets x 100 = 5 245 000 = 1,85
Equity 1 2 835 000
Net profit margin = profit after tax = 500 000 = 16,67%
Revenue 3 000 000
x
Total asset turnover ratio = Revenue = 3 000 000 = 0,57
Total assets 5 245 000
=
EBIT margin x Finance cost burden x Tax burden
EBIT margin = Profit before tax + finance cost = 696 080 + 129 920 = 27,53%
Revenue 3 000 0000
x
Finance cost burden = Profit before tax = 696 080 = 0,82427
EBIT 696 080 + 129 920
x
Tax burden = Profit after tax = 500 000 = 0,7183
Profit before tax 696 080
,ROE =. 1,85 x 0,57 x [27,53% x 0,8427 x 0,7183] = 17,64%
(solvency) (efficiency) (NPM) ROA: Profitability
• Higher finance cost burden will increase ROE
• Lower tax rate = increase in ROE
Problem 1 - Difficult LTD: DuPont
Calculating EBIT
Operating profit 300 000
Loss on the sale of PPE (20 000)
Finance cost (80 000)
Profit before tax 200 000
Tax (30%) (60 000)
Profit after tax 140 000
EBIT = Profit before tax + Finance cost
= 200 000 + 80 000
= 280 000
Calculate Revenue (Sales)
Operating profit = 20%
Revenue
300 000 = 20%
Revenue
Revenue = 1 500 000
FORMULA CALCULATION
EBIT margin Profit before tax + finance cost 280 000 x 100
Revenue 1 500 000 1
=18,67%
Profit before tax 200 000
Finance cost burden EBIT 280 000
= 0,7143
Profit after tax 140 000
Tax burden Profit before tax 200 000
= 0,7
, Revenue 1 500 000
Total assets 2 000 000
Total asset turnover = 0,75
Total assets 2 000 000
Total equity 1 000 000
= 2,00
Financial leverage factor
Profit after tax x 100 140 000 x 100
Return on equity Total equity 1 1 000 000 1
= 14%
Net profit margin = EBIT margin x Finance cost burden x Tax burden
ROA = Net profit margin x Total asset turnover
ROE = ROA x Financial leverage factor
2019 2018
EBIT margin
25% 30%
x x
Finance cost burden
0.75 0.80
x x
Tax burden
0.70 0.70
x x
Total asset turnover
0.6095 0.7440
, x x
Financial leverage factor
1.50 0.80
ROE
12% 10%
The change in ROE can be attributed to the increase in financial leverage form 2018 to 2020
because more debt was being utilised. More debt means higher finance cost
STATEMENT TRUE FALSE MOTIVATION
ROE increased from 10% to 14%
The company’s return on equity improved. x
EBIT margin decreased from 30%
The company’s management of operating expenses to 18,67%
x
improved.
Finance cost burden decreased
(inverse effect)
The company’s finance cost increased. x
Total asset turnover increased from
Effectiveness with which assets were utilised 2013 to 2015 from 0,744 to 0,75
x
improved.
No change in the tax burden
The tax rate decreased. x
Difficult Ltd. - DuPont
ROE = Profit after tax x 100 = 500 000 = 17,64%
Equity 1 2 835 000
=
ROA = Profit after tax x 100 = 500 000 = 9,53%
Total assets 1 5 245 000
x
Leverage = Total assets x 100 = 5 245 000 = 1,85
Equity 1 2 835 000
Net profit margin = profit after tax = 500 000 = 16,67%
Revenue 3 000 000
x
Total asset turnover ratio = Revenue = 3 000 000 = 0,57
Total assets 5 245 000
=
EBIT margin x Finance cost burden x Tax burden
EBIT margin = Profit before tax + finance cost = 696 080 + 129 920 = 27,53%
Revenue 3 000 0000
x
Finance cost burden = Profit before tax = 696 080 = 0,82427
EBIT 696 080 + 129 920
x
Tax burden = Profit after tax = 500 000 = 0,7183
Profit before tax 696 080
,ROE =. 1,85 x 0,57 x [27,53% x 0,8427 x 0,7183] = 17,64%
(solvency) (efficiency) (NPM) ROA: Profitability
• Higher finance cost burden will increase ROE
• Lower tax rate = increase in ROE
Problem 1 - Difficult LTD: DuPont
Calculating EBIT
Operating profit 300 000
Loss on the sale of PPE (20 000)
Finance cost (80 000)
Profit before tax 200 000
Tax (30%) (60 000)
Profit after tax 140 000
EBIT = Profit before tax + Finance cost
= 200 000 + 80 000
= 280 000
Calculate Revenue (Sales)
Operating profit = 20%
Revenue
300 000 = 20%
Revenue
Revenue = 1 500 000
FORMULA CALCULATION
EBIT margin Profit before tax + finance cost 280 000 x 100
Revenue 1 500 000 1
=18,67%
Profit before tax 200 000
Finance cost burden EBIT 280 000
= 0,7143
Profit after tax 140 000
Tax burden Profit before tax 200 000
= 0,7
, Revenue 1 500 000
Total assets 2 000 000
Total asset turnover = 0,75
Total assets 2 000 000
Total equity 1 000 000
= 2,00
Financial leverage factor
Profit after tax x 100 140 000 x 100
Return on equity Total equity 1 1 000 000 1
= 14%
Net profit margin = EBIT margin x Finance cost burden x Tax burden
ROA = Net profit margin x Total asset turnover
ROE = ROA x Financial leverage factor
2019 2018
EBIT margin
25% 30%
x x
Finance cost burden
0.75 0.80
x x
Tax burden
0.70 0.70
x x
Total asset turnover
0.6095 0.7440
, x x
Financial leverage factor
1.50 0.80
ROE
12% 10%
The change in ROE can be attributed to the increase in financial leverage form 2018 to 2020
because more debt was being utilised. More debt means higher finance cost
STATEMENT TRUE FALSE MOTIVATION
ROE increased from 10% to 14%
The company’s return on equity improved. x
EBIT margin decreased from 30%
The company’s management of operating expenses to 18,67%
x
improved.
Finance cost burden decreased
(inverse effect)
The company’s finance cost increased. x
Total asset turnover increased from
Effectiveness with which assets were utilised 2013 to 2015 from 0,744 to 0,75
x
improved.
No change in the tax burden
The tax rate decreased. x
