Task Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University company converts its assets into sales. The asset turnover ratio tends to be inversely related to the net profit margin; ie, the higher the net profit margin, the lower the asset turnover. The result is that the investor can compare companies using different models (low-profit high-volume vs high-profit, low-volume) and determine which one is the more attractive business. It is possible for a company with terrible sales and margins to take on excessive debt and artificially increase its return on equity. The equity multiplier, a measure of financial leverage, allows the investor to see what portion of the return on equity is the result of debt Calculation of Return on Equity To calculate the return on equity using the DuPont model, simply multiply the three components(net profit margin, asset turnover, and equity multiplier. Return on Equity=(Net Profit Margin)(Asset Turnover)(Equity Multiplier Some discussion about financial statement analysis Financial statement analysis can provide meaningful insight into the strategy, management, and operation of a firm. It can also"not provide useful information by producing overabundance of data. Before analysis starts, the following questions must be answered What is the purpose of the analysis? Credit and investment decisions will Focus on different areas What business is the company in? What is going on in the industry and in the economy in general? What is going on in the company right now? Information may be available from the financial press or directly from the company What strategy does this firm use to compete in the industry? Are there variables important to success that the financial statements do not capture? Are there events reflected in the financial statements -such as changes in accounting principles, changes in strategy, unusual or nonrecurring factors- that should be factored out before ratios are calculated? Is this firm comparable to industry averages, or are there differences in accounting policy average size, or strategy that will inval idate comparison? At the same time, analysts must be aware that the above techniques are not absolute measures of performance. They work best when they are used to confirm or refute other information. WhenTask Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University company converts its assets into sales. The asset turnover ratio tends to be inversely related to the net profit margin; i.e., the higher the net profit margin, the lower the asset turnover. The result is that the investor can compare companies using different models (low-profit, high-volume vs. high-profit, low-volume) and determine which one is the more attractive business. It is possible for a company with terrible sales and margins to take on excessive debt and artificially increase its return on equity. The equity multiplier, a measure of financial leverage, allows the investor to see what portion of the return on equity is the result of debt. Calculation of Return on Equity To calculate the return on equity using the DuPont model, simply multiply the three components (net profit margin, asset turnover, and equity multiplier.) Return on Equity = (Net Profit Margin) (Asset Turnover) (Equity Multiplier) Some discussion about financial statement analysis Financial statement analysis can provide meaningful insight into the strategy, management, and operation of a firm. It can also “not provide useful information” by producing an overabundance of data. Before analysis starts, the following questions must be answered: What is the purpose of the analysis? Credit and investment decisions will focus on different areas. What business is the company in? What is going on in the industry and in the economy in general? What is going on in the company right now? Information may be available from the financial press or directly from the company. What strategy does this firm use to compete in the industry? Are there variables important to success that the financial statements do not capture? Are there events reflected in the financial statements — such as changes in accounting principles, changes in strategy, unusual or nonrecurring factors — that should be factored out before ratios are calculated? Is this firm comparable to industry averages, or are there differences in accounting policy, average size, or strategy that will invalidate comparison? At the same time, analysts must be aware that the above techniques are not absolute measures of performance. They work best when they are used to confirm or refute other information. When