DuPont Analysis
Apex Technologies, Inc.
Presented By:
Anurup Upadhyay
March 9, 2015
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Table of Contents
Introduction ..................................................................................................................................... 3
The DuPont Formula....................................................................................................................... 3
Net Profit Margin ........................................................................................................................ 4
Asset Turnover ............................................................................................................................ 5
Leverage ...................................................................................................................................... 5
Correlations & Recommendations .................................................................................................. 5
Conclusion ...................................................................................................................................... 7
References ....................................................................................................................................... 8
Appendices ...................................................................................................................................... 9
A. DuPont Formula Schedule ................................................................................................... 9
B. DuPont Components ............................................................................................................ 9
C. Rising Costs ....................................................................................................................... 10
D. Sales Revenue vs. Net Profits ............................................................................................ 10
E. Capital Structure ................................................................................................................ 11
F.
Market Share ...................................................................................................................... 11
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Introduction
Any company’s return on equity (RoE) is an important measure to gauge its financial
performance in comparison to its competitors. This measure affects stock analysts’ and
investors’ opinions on firms’ financial health, which in turn, influences stock prices in the
market. Given that a company can increase its RoE in many ways, such as by ensuring a higher
profit margin or by taking on more debt (increasing leverage), an assessment of the firm’s
performance and level of risks undertaken solely based on its RoE trends can be misleading.
Therefore, this paper discusses Apex Technologies, Inc.’s financial performance based on a
DuPont analysis, a concept popularized by the chemical company in 1920s (Brealey & Myers,
2012). By breaking down RoE, it provides recommendations to the executive team for the future.
The DuPont Formula
Appendix A presents a schedule of Apex Technologies, Inc.’s performance so far
expressed in terms of the DuPont formula, which is:
RoE = Net Profit Margin * Asset Turnover * Equity Multiplier
As made evident by Appendix B, Apex Technologies, Inc.’s RoE has been on a decline
over the past four periods. It has declined from 14.62% in Period #2 to 4.87% at the end of
Period #6, which is a 66.67% decrease. Based on the DuPont formula, any company’s RoE can
decrease due to the following:

A decrease in net profit margin, which can be attributed to rising costs or a decrease in
price per unit of goods sold
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
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A decrease in asset turnover, which can be attributed to decreasing sales revenue or major
sales of company assets

A decrease in the equity multiplier, which can be attributed to declining leverage (major
debt payoffs or stock issues) and is linked with a decline in level of risk
Each of the components of the DuPont formula are discussed in the context of Apex
Technologies, Inc., below:
Net Profit Margin
Since Period #2, Apex Technologies, Inc.’s
net profit margins have declined from
12.34% to 3.53% (a 71.37% decrease). As price per unit of good and services sold by the
company has been on a constant increase, the decrease in net profit margin comes from
increasing costs, such as:

The Cost of Goods Sold (COGS) at Apex Technologies, Inc. has been increasing
since Period #2. Period #6 COGS ($4.99 million) was 50.71% greater than that in
Period #2 ($3.331 million). Our commitment on human resource development and the
fact that the industry that we operate within is a labor intensive one have contributed
to these increases, as cost of wages and fringe benefits are included in COGS (Smith
et al., 2012) (Appendix C).

The total SBU operating costs in Period #6 was $6.572 million, which is an 89.94%
increase from the same in Period #2 ($3.46 million). This increase is linked with the
company’s continued commitment on quality and product leadership, as
corresponding budgets on new product research and operations technology have seen
dramatic increases (Appendix C).
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Asset Turnover
Apex Technologies, Inc.’s asset turnover has been generally increasing due to a
corresponding increase in sales revenue (Appendix D). Although the company’s total assets did
increase drastically in Period #3 (from $16.796 million to $23.616 million) due to the acquisition
of Venture #8 financed through debt, its asset turnover ratio only saw a slight decline, as sales
revenue too increased with the acquisition. This increase in asset turnover (backed by sales
revenues) in conjunction with the declining net profit margins is concerning for the company in a
strategic sense. As a differentiator in the industry, we vie to achieve higher net profit margins
rather than a high market share. However, the trend, as shown in Appendix D, is alarming to us,
as it resembles one that a cost differentiator would have, and begs the question whether we are
stuck in the middle (Porter, 1985).
Leverage
The equity multiplier and the debt to equity ratio have been on a general decline since the
end of Period #3 after their uptick during that period due to the purchase of Venture #8, which
was financed by a combination of bank loan and bond issue (leading to an increase in total
liabilities) (Appendix E). While this general decline in leverage has pushed the level of risk that
can be attributed to Apex Technologies, Inc. downward, it has also caused the decline in the
company’s RoE to a certain extent (a positive correlation of 19.23%, see ‘Correlations’ section
below).
Correlations & Recommendations
The following table outlines the varying levels of correlations seen between RoE and the
three components of the DuPont formula in the context of Apex Technologies, Inc.:
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Correlations between RoE and DuPont Components
Net Profit Margin
Asset Turnover
Equity Multiplier & Debt to Equity
97.33%
-81.03%
19.23%
From the table above, one can clearly see that the RoE for Apex Technologies, Inc. is
strongly correlated with the net profit margin due to the common variable of net profit. Although
the asset turnover ratio can greatly influence the RoE if there are drastic changes in sales revenue
or the amount of total assets, in our company’s context, this measure does not seem to have a
coherent relationship with RoE. Finally, the financial leverage indicators (equity multiplier as
well as debt to equity ratio) seem to a slight positive correlation with RoE.
With the analysis of these correlations and the understanding that companies can
influence their RoE through the aforesaid three components, the following recommendations
must be shared with the executive team of Apex Technologies, Inc.:

The company’s RoE is suffering greatly due to the plummeting net profit margins.
The executive team must review its budgets to control costs in areas where the point
of diminishing returns have been reached/crossed or in areas that do not directly
impact the company’s differentiation basis – product leadership.

The company’s sales revenue is rising and net profits are declining. While the most
recent decline in net profit margin can be partially attributed to the one-time costs of
export market initiation, it is still crucial for the executive team to review pricing to
control market share (Appendix F) and push net profit margins upward.
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
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While it is true that high leverage can elevate the risks for the company, it, at the
same time, can prevent the dilution of shareholder value (due to frequent stock
issuances for capital) and positively influence RoE, with the support of the other
components of the DuPont formula. Therefore, as long as Apex Technologies, Inc.
continues to achieve strong results in term of net profits and net profit margins, the
executive team need not expedite the payment of debts. Rather, it can use excess cash
to buy back stock and issue dividends in order to return some of the gains back to our
stockholders.

Provided that Apex Technologies, Inc. seeks to expand in the future, it is ideal for the
executive team to take on more debt to finance the expansion rather than issue stock.
Conclusion
The DuPont analysis conducted for Apex Technologies, Inc. has directed the executive
team’s focus toward such aspects of operations that have not been considered effectively: rising
COGS, market share increase issues, and cost control in areas where increasing investments have
begun to produce negative returns (example: marketing) or in areas that do not directly impact
the company’s differentiation basis. Moving forward, the executive team will further delve into
these issues in order to prevent any sort of misalignment between corporate strategy and period
to period decision making.
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References
Brealey, R., & Myers, S. (2012). Measuring Corporate Performance. In Fundamentals of
corporate finance (7th ed.). New York: McGraw-Hill/Irwin.
Porter, M. E. (1985). Competitive Strategy: The Core Concepts. In M. E. Porter, Competitive
Advantage. Unites States: The Free Press.
Smith, J., Golden, P. & Deighan, M. (2012). Corporation: A Global Business Simulation.
Interpretive Software, Inc., Charlottesville, VA.
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Appendices
A. DuPont Formula Schedule
B. DuPont Components
DuPont Components
3.0000
2.5000
2.0000
Net Profit Margin
Asset Turnover
1.5000
Equity Multiplier
Return on Equity
1.0000
0.5000
1
2
3
4
5
6
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C. Rising Costs
Rising Costs (in thousands)
$8,000
$7,000
$6,000
$5,000
Cost of Goods Sold
$4,000
Total Operating Costs
SBU Operating Costs
$3,000
$2,000
$1,000
$0
1
2
3
4
5
6
D. Sales Revenue vs. Net Profits
Sales Revenue vs. Net Profits
(in thousands)
$16,000
$14,000
$12,000
$10,000
Net Profit
$8,000
Sales Revenue
$6,000
$4,000
$2,000
$1
2
3
4
5
6
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E. Capital Structure
Capital Structure (in thousands)
$30,000
$25,000
Total Assets
$20,000
Total Liabilities
$15,000
Total Stockholders' Equity
$10,000
$5,000
$1
2
3
4
5
6
F. Market Share
Market Share (%)
13
12.5
12.8
12.3
12.2
12
12
12
11.5
Market Share
11
10.5
10.5
10
1
2
3
4
5
6