Boundless Lecture Slides
Available on the Boundless Teaching Platform
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless Teaching
Platform
Boundless empowers educators to engage their students
with affordable, customizable textbooks and intuitive
teaching tools. The free Boundless Teaching Platform
gives educators the ability to customize textbooks in
more than 20 subjects that align to hundreds of popular
titles. Get started by using high quality Boundless books,
or make switching to our platform easier by building from
Boundless content pre-organized to match the assigned
textbook. This platform gives educators the tools they
need to assign readings and assessments, monitor
student activity, and lead their classes with pre-made
teaching resources.
Using Boundless Presentations
The Appendix
The appendix is for you to use to add depth and
breadth to your lectures. You can simply drag and
drop slides from the appendix into the main
presentation to make for a richer lecture
experience.
Get started now at:
http://boundless.com/teaching-platform
Free to edit, share, and copy
Feel free to edit, share, and make as many copies
of the Boundless presentations as you like. We
encourage you to take these presentations and
make them your own.
If you have any questions or problems please email:
educators@boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
About Boundless
Boundless is an innovative technology company making education more affordable and
accessible for students everywhere. The company creates the world’s best open educational
content in 20+ subjects that align to more than 1,000 popular college textbooks. Boundless
integrates learning technology into all its premium books to help students study more efficiently
at a fraction of the cost of traditional textbooks. The company also empowers educators to
engage their students more effectively through customizable books and intuitive teaching tools
as part of the Boundless Teaching Platform. More than 2 million learners access Boundless free
and premium content each month across the company’s wide distribution platforms, including its
website, iOS apps, Kindle books, and iBooks. To get started learning or teaching with
Boundless, visit boundless.com.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Analyzing Financial Statements > The DuPont Equation, ROE, ROA, and Growth
The DuPont Equation, ROE, ROA, and Growth
• Assessing Internal Growth and Sustainability
• Dividend Payments and Earnings Retention
• Relationships between ROA, ROE, and Growth
• The DuPont Equation
• ROE and Potential Limitations
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.www/boundless.com/accounting?campaign_content=book_378_section_105&campaign_term=Accounting&utm_campaign=powerpoint&utm
_medium=direct&utm_source=boundless
Analyzing Financial Statements > The DuPont Equation, ROE, ROA, and Growth
Assessing Internal Growth and Sustainability
• The internal growth rate is a formula for calculating the maximum growth rate a
firm can achieve without resorting to external financing.
• Sustainable growth is defined as the annual percentage of increase in sales that
is consistent with a defined financial policy.
• Another measure of growth, the optimal growth rate, assesses sustainable growth
from a total shareholder return creation and profitability perspective, independent
of a given financial strategy.
Revenue Growth and Profitability
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.www/boundless.com/accounting/textbooks/boundless-accounting-textbook/analyzing-financial-statements-16/the-dupont-equation-roe-roaand-growth-105/assessing-internal-growth-and-sustainability-432-
Analyzing Financial Statements > The DuPont Equation, ROE, ROA, and Growth
Dividend Payments and Earnings Retention
• Many corporations retain a portion of their earnings and pay the remainder as a
dividend.
• Dividends are usually paid in the form of cash, store credits, or shares in the
company.
• Cash dividends are a form of investment income and are usually taxable to the
recipient in the year that they are paid.
• Dividend payout ratio is the fraction of net income a firm pays to its stockholders
in dividends.
• Retained earnings can be expressed in the retention ratio.
Example Balance Sheet
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.www/boundless.com/accounting/textbooks/boundless-accounting-textbook/analyzing-financial-statements-16/the-dupont-equation-roe-roaand-growth-105/dividend-payments-and-earnings-retention-433-
Analyzing Financial Statements > The DuPont Equation, ROE, ROA, and Growth
Relationships between ROA, ROE, and Growth
• Return on equity measures the rate of return on the shareholders' equity of
common stockholders.
• Return on assets shows how profitable a company's assets are in generating
revenue.
• In other words, return on assets makes up two-thirds of the DuPont equation
measuring return on equity.
• Capital intensity is the term for the amount of fixed or real capital present in
relation to other factors of production. Rising capital intensity pushes up the
productivity of labor.
Return On Assets
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.www/boundless.com/accounting/textbooks/boundless-accounting-textbook/analyzing-financial-statements-16/the-dupont-equation-roe-roaand-growth-105/relationships-between-roa-roe-and-growth-434-
Analyzing Financial Statements > The DuPont Equation, ROE, ROA, and Growth
The DuPont Equation
• By splitting ROE into three parts, companies can more easily understand changes
in their returns on equity over time.
• As profit margin increases, every sale will bring more money to a company's
bottom line, resulting in a higher overall return on equity.
• As asset turnover increases, a company will generate more sales per asset
owned, resulting in a higher overall return on equity.
• Increased financial leverage will also lead to an increase in return on equity, since
using more debt financing brings on higher interest payments, which are tax
deductible.
DuPont Model
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.www/boundless.com/accounting/textbooks/boundless-accounting-textbook/analyzing-financial-statements-16/the-dupont-equation-roe-roaand-growth-105/the-dupont-equation-435-
Analyzing Financial Statements > The DuPont Equation, ROE, ROA, and Growth
ROE and Potential Limitations
• Return on equity is an indication of how well a company uses investment funds to
generate earnings growth.
• Returns on equity between 15% and 20% are generally considered to be
acceptable.
• Return on equity is equal to net income (after preferred stock dividends but before
common stock dividends) divided by total shareholder equity (excluding preferred
shares).
• Stock prices are most strongly determined by earnings per share (EPS) as
opposed to return on equity.
Return On Equity
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.www/boundless.com/accounting/textbooks/boundless-accounting-textbook/analyzing-financial-statements-16/the-dupont-equation-roe-roaand-growth-105/roe-and-potential-limitations-436-
Appendix
Free to share, print, make copies and changes. Get yours at www.boundless.com
Analyzing Financial Statements
Key terms
• competitive advantage something that places a company or a person above the competition
• fundamental analysis An analysis of a business with the goal of financial projections in terms of income statement, financial
statements and health, management and competitive advantages, and competitors and markets.
• quantitatively With respect to quantity rather than quality.
• retention The act of retaining; something retained
• retention ratio retained earnings divided by net income
• return on common stockholders' equity a fiscal year's net income (after preferred stock dividends but before common stock
dividends) divided by total equity (excluding preferred shares), expressed as a percentage
• stock split To issue a higher number of new shares to replace old shares. This effectively increases the number of shares
outstanding without changing the market capitalization of the company.
• sustainable growth rate the optimal growth from a financial perspective assuming a given strategy with clear defined financial
frame conditions/ limitations
Free to share, print, make copies and changes. Get yours at www.boundless.com
Analyzing Financial Statements
ROE Broken Down
This is an expression of return on equity decomposed into its various factors.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "DuPont analysis." GNU FDL http://en.wikipedia.org/wiki/DuPont_analysis View on Boundless.com
Analyzing Financial Statements
Earnings Per Share
EPS is equal to profit divided by the weighted average of common shares.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Earnings per share." GNU FDL http://en.wikipedia.org/wiki/Earnings_per_share View on Boundless.com
Analyzing Financial Statements
Dividend Payout Ratio
The dividend payout ratio is equal to dividend payments divided by net income for the same period.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Dividend payout ratio." GNU FDL http://en.wikipedia.org/wiki/Dividend_payout_ratio View on Boundless.com
Analyzing Financial Statements
Return On Assets
Return on assets is equal to net income divided by total assets.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Return on assets." GNU FDL http://en.wikipedia.org/wiki/Return_on_assets View on Boundless.com
Analyzing Financial Statements
Revenue Growth and Profitability
ROA, ROS and ROE tend to rise with revenue growth to a certain extent.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Sustainable growth rate." GNU FDL http://en.wikipedia.org/wiki/Sustainable_growth_rate View on Boundless.com
Analyzing Financial Statements
Return On Equity
ROE is equal to after-tax net income divided by total shareholder equity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Return on equity." GNU FDL http://en.wikipedia.org/wiki/Return_on_equity View on Boundless.com
Analyzing Financial Statements
The DuPont Equation
In the DuPont equation, ROE is equal to profit margin multiplied by asset turnover multiplied by financial leverage.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Return on equity." GNU FDL http://en.wikipedia.org/wiki/Return_on_equity View on Boundless.com
Analyzing Financial Statements
Example Balance Sheet
Retained earnings can be found on the balance sheet, under the owners' (or shareholders') equity section.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | y2cary3n6mng-q6hnvf-balance-sheet | Flickr - Photo Sharing!." CC BY-SA
http://www.flickr.com/photos/sampjb/7690684984/sizes/m/in/photostream/ View on Boundless.com
Analyzing Financial Statements
DuPont Model
A flow chart representation of the DuPont Model.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "File:DuPontModelEng.svg - Wikipedia, the free encyclopedia." CC0 1.0 Universal
http://en.wikipedia.org/w/index.php?title=File:DuPontModelEng.svg&page=1 View on Boundless.com
Analyzing Financial Statements
A company has $2 million in net income, of which it pays
$500,000 in dividends. At the beginning of the financial year it had
$3 million in assets; at the end of the year it had $5 million in total
assets. What is the company's internal growth rate?
A) -25%
B) 25%
C) -35%
D) 15%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Analyzing Financial Statements
A company has $2 million in net income, of which it pays
$500,000 in dividends. At the beginning of the financial year it had
$3 million in assets; at the end of the year it had $5 million in total
assets. What is the company's internal growth rate?
A) -25%
B) 25%
C) -35%
D) 15%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Analyzing Financial Statements
A company has net income of $2 million. For the same period it
paid $750,000 in dividends. What is its retention ratio?
A) 0.625
B) 0.375
C) 1.375
D) 1.625
Free to share, print, make copies and changes. Get yours at www.boundless.com
Analyzing Financial Statements
A company has net income of $2 million. For the same period it
paid $750,000 in dividends. What is its retention ratio?
A) 0.625
B) 0.375
C) 1.375
D) 1.625
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Analyzing Financial Statements
Which of the following statements about the Return on Assets
ratio is NOT true?
A) Return on asset is used to determine a company's sustainable growth
rate.
B) Return on assets is used to measure a company's capital intensity.
C) Return on assets shows what a company can do with what it has.
D) The return on assets ratio is used to determine a company's internal
growth rate.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Analyzing Financial Statements
Which of the following statements about the Return on Assets
ratio is NOT true?
A) Return on asset is used to determine a company's sustainable growth
rate.
B) Return on assets is used to measure a company's capital intensity.
C) Return on assets shows what a company can do with what it has.
D) The return on assets ratio is used to determine a company's internal
growth rate.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Analyzing Financial Statements
Which of the following is NOT a benefit associated with using the
DuPont Equation?
A) Analysts can determine which factor is dominant in determining a
company's return on equity.
B) The DuPont equation is very useful in analyzing any business
regardless of industry.
C) The DuPont equation can show whether a high level of leverage is
risky or necessary for a company.
D) Analysts can use the DuPont equation to understand the fluctuations
of a company's Return on Equity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Analyzing Financial Statements
Which of the following is NOT a benefit associated with using the
DuPont Equation?
A) Analysts can determine which factor is dominant in determining a
company's return on equity.
B) The DuPont equation is very useful in analyzing any business
regardless of industry.
C) The DuPont equation can show whether a high level of leverage is
risky or necessary for a company.
D) Analysts can use the DuPont equation to understand the fluctuations
of a company's Return on Equity.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Analyzing Financial Statements
A company had $2 million in net income before dividends. It had
$300,000 in preferred stock dividends and $500,000 in common
stock dividends. The company has $1,500,00 in shareholder
equity. What is the company's return on equity?
A) 0.80
B) 1.33
C) 1.53
D) 1.13
Free to share, print, make copies and changes. Get yours at www.boundless.com
Analyzing Financial Statements
A company had $2 million in net income before dividends. It had
$300,000 in preferred stock dividends and $500,000 in common
stock dividends. The company has $1,500,00 in shareholder
equity. What is the company's return on equity?
A) 0.80
B) 1.33
C) 1.53
D) 1.13
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Analyzing Financial Statements
Attribution
• Wikipedia. "Return on equity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Return_on_equity
• Wikipedia. "DuPont analysis." CC BY-SA 3.0 http://en.wikipedia.org/wiki/DuPont_analysis
• Wikipedia. "Earnings per share." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Earnings_per_share
• Wikibooks. "Principles of Finance/Section 1/Chapter 6/Corp/ROE." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_6/Corp/ROE
• Wiktionary. "fundamental analysis." CC BY-SA 3.0 http://en.wiktionary.org/wiki/fundamental+analysis
• Wikipedia. "Sustainable growth rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Sustainable_growth_rate
• Wikipedia. "Return on equity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Return_on_equity
• Wikispaces. "SU3FINANCE - Chapter 17 - Financial Modeling and Pro Forma Analysis." CC BY-SA
http://su3finance.wikispaces.com/Chapter+17+-+Financial+Modeling+and+Pro+Forma+Analysis
• Wikipedia. "Sustainable growth rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Sustainable_growth_rate
• Wikipedia. "Retention ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Retention_ratio
• Wiktionary. "retention." CC BY-SA 3.0 http://en.wiktionary.org/wiki/retention
• Wikipedia. "Return on equity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Return_on_equity
• Wikipedia. "Return on assets." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Return_on_assets
• Wikipedia. "Capital intensity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_intensity
• Wikispaces. "SU3FINANCE - Chapter 17 - Financial Modeling and Pro Forma Analysis." CC BY-SA
http://su3finance.wikispaces.com/Chapter+17+-+Financial+Modeling+and+Pro+Forma+Analysis
• Wikipedia. "Return on equity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Return_on_equity
• Wiktionary. "quantitatively." CC BY-SA 3.0 http://en.wiktionary.org/wiki/quantitatively
Free to share, print, make copies and changes. Get yours at www.boundless.com
Analyzing Financial Statements
• Wikipedia. "DuPont analysis." CC BY-SA 3.0 http://en.wikipedia.org/wiki/DuPont_analysis
• Wikipedia. "Net margin." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_margin
• Wikipedia. "Asset turnover." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Asset_turnover
• Wiktionary. "competitive advantage." CC BY-SA 3.0 http://en.wiktionary.org/wiki/competitive+advantage
• Wikipedia. "Return on equity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Return_on_equity
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/stock-split
• Wikipedia. "Dividend." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Dividend
• Wikipedia. "Dividend payout ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Dividend_payout_ratio
• Wikipedia. "Statement of Retained Earnings." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Statement_of_Retained_Earnings
• Wikipedia. "Retention ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Retention_ratio
• Wikipedia. "Retained earnings." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Retained_earnings
Free to share, print, make copies and changes. Get yours at www.boundless.com