Analysis of industry charateristic with Dupon strategy

In the 1920s, DuPont Corporation pioneered one of the methods of analysis of company performance up to this time known as the DuPont Analysis. In essence, DuPont analysis done by splitting the return on equity (ROE) into several parts. Why is ROE? ROE describe the magnitude of rate of return earned by shareholders. By splitting the calculation of ROE, we can find out how a business is profit. As we know the formula for ROE is

In DuPont analysis, ROE is broken down into 3 parts:

or can also be written:

ROE = Net profit margin x Assets turnover x equity multiplier

Every business has the characteristics of each to get a high ROE. Basically, the industry can be divided into 3 groups:

1. High turnover industries
Industries that have high turnover one of which is retail. Competition in this industry is so tight that a high ROE can not be obtained by wearing a premium price to the consumer. To obtain a high ROE they play in the volume of sales. Characteristic of this industry (in accordance with the formula ROE) is the high asset turnover.
2. High margin industries
Particular industry can get a high profit margin. They are not too dependent on sales volume. Industry type is characterized by a high net profit margin.
3. High leverage industries
Relatively high leverage industry is banking. For banks, savings from the customer is treated as a debt that can be used as capital to extend credit. Profits earned by the bank is the difference between interest credit with the interest savings / deposits. Industry into the class is characterized by high equity multiplier. If stated in the debt to equity ratio (DER), then: Equity multiplier = 1 DER.

By knowing the characteristics of the industry, we will be able to know with more accurate if a critical component that is a source of profit to fall, its influence would be significant to the performance.

Case Example:

Retail Industry (High Turnover Industry)
As was mentioned earlier, the dominant constituent ROE for the retail industry is asset turnover. The low margins in this industry is covered by high asset turnover. In principle, the more goods are sold, the greater the gains. The increase in sales can be obtained from two ways. The first is to increase the volume and the second is to increase the number of outlets. Because in general retail businesses do both, often they use a parameter called the Same Store Growth (SSG). Same Store Growth measures the growth rate of sales if they did not increase the number of outlets. By using the SSG, they can tell if the opening of new outlets will provide additional benefits for them.
Another measure used is Revenue per Square Metre (Sales per Square Meter). In general, retail businesses high operational cost to rent a place. Therefore, the revenue per square metre is crucial.

Banking Industry (High Leverage Industry)
Nature of the banking industry is the high leverage on the DuPont formula above is shown by the equity multiplier. The greater the equity multiplier, the higher its leverage. Leverage this in a language easy it is debt. In general, we should be wary of companies with high leverage because it is very susceptible to changes in economic conditions. The banking industry itself depends on the NIM (net interest margin). The greater the NIM, the greater the gains. Recent downward trend in interest rates has led the bank to get a sizable profit. As shown in the table, the high profit margins is the impact of low interest rates. Note however, that high profit margins is not a hallmark of the banking industry because it can change according to trends in interest rates.

Cement Industry (High Margin Industry)
Along with economic growth, the cement industry was to get his blessing. Seen that the average profit margin is quite high (ranging from about 20%). Turnover mediocre assets and its leverage is relatively low. We can conclude that the profit margin is a dominant factor for the high ROE.
In order for DuPont analysis may be more effective, it helps us look at historical data. Thus we will be able to see whether the dominance of one of the factors making up the ROE is really a characteristic of an industry or just a temporary trend