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指导教师姓名***

专业技术职务副教授

外文资料

FIVEWAYSTOIMPROVERETURNONEQUITY

TheDuPontModel:

ABriefHistory

Theuseoffinancialratiosbyfinancialanalysts,lenders,academicresearchers,andsmallbusinessownershasbeenwidelyacknowlegedintheliterature.（See,forexample,Osteryoung&

Constand（1992）,Devine&

Seaton（1995）,orBurson（1998）TheconceptsofReturnonAssets（ROAhereafter）andReturnonEquity（ROEhereafter）areimportantforunderstandingtheprofitabilityofabusinessenterprise.Specifically,a“returnon”ratioillustratestherelationshipbetweenprofitsandtheinvestmentneededtogeneratethoseprofits.However,theseconceptsareoften“toofarremovedfromnormalactivities”tobeeasilyunderstoodandusefultomanymanagersorsmallbusinessowners.（SlaterandOlson,1996）

In1918,fouryearsafterhewashiredbytheDuPontCorporationtoworkinitstreasurydepartment,electricalengineerF.DonaldsonBrownwasgiventhetaskofuntanglingthefinancesofacompanyofwhichDuPonthadjustpurchased23percentofitsstock.（ThiscompanywasGeneralMotors!

）Brownrecognizedamathematicalrelationshipthatexistedbetweentwocommonlycomputedratios,namelynetprofitmargin（obviouslyaprofitabilitymeasure）andtotalassetturnover（anefficiencymeasure）,andROA.TheproductofthenetprofitmarginandtotalassetturnoverequalsROA,andthiswastheoriginalDuPontmodel,asillustratedinEquation1below.

Eq.1:

（netincome/sales）x（sales/totalassets）=（netincome/totalassets）i.e.ROA

AtthispointintimemaximizingROAwasacommoncorporategoalandtherealizationthatROAwasimpactedbybothprofitabilityandefficiencyledtothedevelopmentofasystemofplanningandcontrolforalloperatingdecisionswithinafirm.Thisbecamethedominantformoffinancialanalysisuntilthe1970s.（Blumenthal,1998）

Inthe1970sthegenerallyacceptedgoaloffinancialmanagementbecame“maximizingthewealthofthefirm’sowners”（Gitman,1998）andfocusshiftedfromROAtoROE.ThisledtothefirstmajormodificationoftheoriginalDuPontmodel.Inadditiontoprofitabilityandefficiency,thewayinwhichafirmfinanceditsactivities,i.e.itsuseof“leverage”becameathirdareaofattentionforfinancialmanagers.Thenewratioofinterestwascalledtheequitymultiplier,whichis（totalassets/equity）.ThemodifiedDuPontmodelisshowninEquations1and2below.

Eq.2:

ROAx（totalassets/equity）=ROE

Eq.3:

（netincome/sales）x（sales/totalassets）x（totalassets/equity）=ROE

ThemodifiedDuPontmodelbecameastandardinallfinancialmanagementtextbooksandastapleofintroductoryandadvancedcoursesalikeasstudentsreadstatementssuchas:

“Ultimately,themostimportant,or“bottomline”accountingratioistheratioofnetincometocommonequity（ROE）.”（BrighamandHouston,2001）Themodifiedmodelwasapowerfultooltoillustratetheinterconnectednessofafirm’sincomestatementanditsbalancesheet,andtodevelopstraight-forwardstrategiesforimprovingthefirm’sROE.

Morerecently,HawawiniandViallet（1999）offeredyetanothermodificationtotheDuPont

model.ThismodificationresultedinfivedifferentratiosthatcombinetoformROE.Intheirmodificationtheyacknowlegethatthefinancialstatementsfirmspreparefortheirannualreports（whichareofmostimportancetocreditorsandtaxcollectors）arenotalwaysusefultomanagersmakingoperatingandfinancialdecisions.（BrighamandHouston,p.52）Theyrestructuredthetraditionalbalancesheetintoa“managerialbalancesheet”whichis“amoreappropriatetoolforassessingthecontributionofoperatingdecisionstothefirm’sfinancialperformance.”（HawawiniandViallet,p.68）Thisrestructuredbalancesheetusestheconceptof“investedcapital”inplaceoftotalassets,andtheconceptof“capitalemployed”inplaceoftotalliabilitiesandowner’sequityfoundonthetraditionalbalancesheet.Theprimarydifferenceisinthetreatmentoftheshort-term“workingcapital”accounts.Themanagerialbalancesheetusesanetfigurecalled“workingcapitalrequirement”（determinedas:

[accountsreceivable+inventories+prepaidexpenses]–[accountspayable+accruedexpenses]）asapartofinvestedcapital.Theseaccountsthenindividuallydropoutofthemanagerialbalancesheet.Amoredetailedexplanationofthemanagerialbalancesheetisbeyondthescopeofthispaper,butwillbepartiallyillustratedinanexample.The“really”modifiedDuPontmodelisshownbelowinEquation4.

Eq.4:

（EBIT/sales）x（sales/investedcapital）x（EBT/EBIT）x（investedcapital/equity）x（EAT/EBT）=ROE

（Where:

investedcapital=cash+workingcapitalreq