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 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:
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:
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.
Further, the leverage multiplier has been studied and it has been found that it is the major and main element to evaluate the return on equity of an organization on the basis of DuPont analysis. Leverage multiplier is calculated on the basis of total assets and total equity of an organization. Leverage multiplier evaluates the level of total assets of the company on the basis of total equity. It is measures to identify the financial performance of the company. The formula of leverage multiplier is as follows:
The leverage multiplier briefs that it affects the better impact on the total return on equity of an organization and thus it is required for the company to calculated and measure the performance of the company (Burja & M?rginean, 2014). The better the leverage multiplier of a company the better the ROE would be.
Return on assets has been studied and it has been found that it is the major and main element to evaluate the return on equity of an organization on the basis of DuPont analysis. Return on assets is calculated on the basis of net income and total assets of an organization. Return on assets evaluates the level of total net profit of the company on the basis of total assets. It is measures to identify the financial performance of the company. The formula of return on assets is as follows:
Return on assets briefs that it affects the better impact on the total return on equity of an organization and thus it is required for the company to calculated and measure the performance of the company. The better the Return on assets of a company the better the ROE would be (Alhabeeb, 2012).
Net profit margin is the part of return on assets. It is measured in DuPont analysis to calculate the return on assets of the company. Net profit margin briefs the net profit of the company against the total revenue of the company. Formula of net profit margin is as follows:
Net profit margin briefs that it indirectly impacts on the return on equity of an organization and thus it is required for an organization to maintain better net profit margin to enhance the level of return on equity of the company.
Asset utilization is the part of return on assets. It is measured in DuPont analysis to calculate the return on assets of the company. Asset utilization briefs the total revenue of the company against the total assets of the company. Formula of assets utilization is as follows:
Asset utilization briefs that it indirectly impacts on the return on equity of an organization and thus it is required for an organization to maintain better asset utilization capacity to enhance the level of return on equity of the company (Chang, Chichernea & HassabElnaby, 2014).
DuPont analysis of four major banks of Australia:
The DuPont analysis study has been done on the major 4 banks of Australia and the following figures have been calculated.
|
Panel A: ROE (Net income / Equity) |
|||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
ANZ |
13.76% |
14.76% |
13.09% |
9.87% |
10.87% |
|
CBA |
17.08% |
17.68% |
17.29% |
15.33% |
15.72% |
|
WBC |
14.62% |
15.60% |
15.08% |
12.80% |
13.03% |
|
NAB |
11.65% |
10.66% |
11.11% |
0.44% |
10.11% |
|
Panel B: ROA (Net income / total assets) |
|||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
ANZ |
0.89% |
0.94% |
0.84% |
0.62% |
0.71% |
|
CBA |
1.02% |
1.09% |
1.04% |
0.99% |
1.02% |
|
WBC |
0.98% |
0.98% |
0.99% |
0.89% |
0.94% |
|
NAB |
0.67% |
0.58% |
0.65% |
0.03% |
0.66% |
|
Panel C: Leverage Multiplier (Total assets / equity) |
|||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
ANZ |
15.43 |
15.69 |
15.54 |
15.82 |
15.22 |
|
CBA |
16.77 |
16.21 |
16.66 |
15.50 |
15.46 |
|
WBC |
14.94 |
15.91 |
15.30 |
14.44 |
13.90 |
|
NAB |
17.36 |
18.44 |
17.21 |
15.16 |
15.37 |
|
Panel D: Asset utilization (revenue / total assets) |
|||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
ANZ |
4.07% |
3.82% |
3.43% |
3.27% |
3.25% |
|
CBA |
4.61% |
4.25% |
3.90% |
3.62% |
3.41% |
|
WBC |
4.74% |
4.18% |
3.98% |
3.79% |
3.67% |
|
NAB |
3.87% |
3.48% |
3.19% |
3.55% |
3.48% |
|
Panel E: Net margin (Net income / revenue) |
|||||
|
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
ANZ |
21.91% |
24.63% |
24.55% |
19.06% |
22.00% |
|
CBA |
22.10% |
25.65% |
26.58% |
27.29% |
29.82% |
|
WBC |
20.65% |
23.45% |
24.79% |
23.38% |
25.56% |
|
NAB |
17.33% |
16.58% |
20.26% |
0.83% |
18.93% |
(Annual Report, 2017)
It expresses 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. The calculations make it easier for the investors to evaluate the financial position and investment position of the company.
Return on equity of all the 4 major banks have been calculated and it has been measured that the return on equity of common wealth bank of Australia is highest in last 5 years. The trend of ROE briefs that in 2016, the ROE of every bank has been lower due to financial crisis impact and some industrial issues, though, the current performance of the industry is quite good, the ROE of NAB explains about lowest ROE in the competitors and the main impact of the ROE has been taken place due to lower return on assets of the companies (Kasilingam & Jayabal, 2012). The risk implications of the companies have also been evaluated and it has been recognized that the current positions of the bank industry has been better and the risk position has been lower in the industry.
Leverage multiplier of all the 4 major banks has been calculated and it has been measured that the leverage multiplier of common wealth bank of Australia is highest in current year. Though, the figure 3 explains that the performance of all the 4 banks is quite better in last 5 years. The trend of leverage multiplier briefs that the position of all the 4 banks in last 5 years are quite similar and express about a better position of the bank industry in terms of liquidity (Van Weele, 2010). The risk implications of the companies have also been evaluated and it has been recognized that the current positions of the bank industry is better and thus the risk position has been lower in the industry.
Return on assets of all the 4 major banks have been calculated further and it has been measured that the return on assets of common wealth bank of Australia is highest in last 5 years. The trend of ROA briefs that in 2016, the ROA of every bank has been lower due to financial crisis impact and some industrial issues and due to it, the return on equity of the company has been lower. Though, the current performance of the industry is quite good, the ROA of NAB explains about lowest ROA in the competitors. The risk implications of the companies have also been evaluated and it has been recognized that the current positions of the bank industry has been better from last year and thus the risk position has been lower in the industry.
In addition, net profit margin of all the 4 major banks has been calculated and it has been measured that the net profit margin of common wealth bank of Australia is highest in last 5 years and due to it, the return on equity of common wealth bank of Australia is also higher (Gibson, 2011). The trend of net profit margin briefs that the profitability level of the industry is getting better day by day and explains that the bank industry performance is better. The risk implications of the companies briefs that the current positions of the bank industry has been better and due to it, the risk position has been lower in the industry.
Lastly, asset utilization of all the 4 major banks has been calculated and it has been measured that the asset utilization of ANZ is highest in last 5 years though the other level and factors of the bank is lower and due to it, the return on equity of ANZ is lower. The trend of asset utilization briefs that the assets level of the industry is quite competitive and explains that the bank industry performance is better. The risk implications of asset utilization of the companies briefs that the current positions of the bank industry has been better and due to it, the risk position has been lower in the industry.
The ROE evaluation of bank industry of Australia of last 5 years brief that the position of return on equity of the industry was quite better till 2015 and due to changes into assets position of the industry, the return on equity has been impacted and thus the current ROE position has been lower. Though, the future prediction about the return on equity of Australian banks have been studied and evaluated and on the basis of study, it has been recognized that the return on equity of the industry would be better in near future. The growth rate of the ROE would not be much greater but the ROE would grow with a lower rate. It explains that the performance of the industry would be much better in near future.
Conclusion:
To conclude, the banking industry of Australia is performing well in current scenario. In case of individual security, Commonwealth bank of Australia is the best security. The prediction study explains that the performance of the banking industry would be much better in near future. It explains that the investment opportunity in the Australian banking industry is quite better.
References:
Alhabeeb, M. J. (2012). Mathematical finance. Wiley.
Annual Report. (2017). Australia and New Zealand Bank. Retrieved as on 15th April 2018 from https://shareholder.anz.com/sites/default/files/2017_anz_annual_report.pdf
Annual Report. (2017). Commonwealth bank of australia. Retrieved as on 15th April 2018 from https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf
Annual Report. (2017). National Bank of Australia. Retrieved as on 15th April 2018 from https://www.nab.com.au/content/dam/nabrwd/About-Us/shareholder-centre/documents/2017-annual-financial-report.pdf
Annual Report. (2017). Westpac Bank. Retrieved as on 15th April 2018 from https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2017_Westpac_Annual_Review_and_Sustainability_Report.pdf
Burja, V., & M?rginean, R. (2014). The study of factors that may influence the performance by the Dupont analysis in the furniture industry. Procedia Economics and Finance, 16, 213-223.
Chang, K. J., Chichernea, D. C., & HassabElnaby, H. R. (2014). On the DuPont analysis in the health care industry. Journal of Accounting and Public Policy, 33(1), 83-103.
Clark Jr, W. H., Elder, D. E., Guerry IV, D., Braitman, L. E., Trock, B. J., Schultz, D., … & Halpern, A. C. (2009). Model predicting survival in stage I melanoma based on tumor progression. JNCI: Journal of the National Cancer Institute, 81(24), 1893-1904.
Gibson, C. H. (2011). Financial reporting and analysis. South-Western Cengage Learning.
Kasilingam, R., & Jayabal, G. (2012). Profitability and Solvency Analysis of A Manufacturing Company using Dupont and Altman Model. BVIMR management edge, 5(2).
Liesz, T. J., & Maranville, S. J. (2008). Ratio Analysis featuring the Dupont Method: an overlooked topic in the finance module of small business management and entrepreneurship courses. Small Business Institute Journal, 1(1).
Little, P. L., Mortimer, J. W., Keene, M. A., & Henderson, L. R. (2011). Evaluating the effect of recession on retail firms’ strategy using DuPont method: 2006-2009. Journal of Finance and Accountancy, 7, 1.
Van Weele, A. J. (2010). Purchasing and supply chain management: Analysis, strategy, planning and practice. Cengage Learning EMEA.
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