Next, Financial Analysis
Framework for of Business Analysis and Valuation
Financial
Other Public Data:
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1. Earn an ROE > r (cost of equity capital)
2. Grow!
How to Create Lots and Lots of Value…?
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Decomposing ROE:
The “Baby” Dupont Model
Return on Equity (ROE)
(Net Income/Equity)
Profit Margin x Asset Turnover x Financial Leverage
payable turnover current ratio
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Strategic choices influencing tradeoff
cost leadership strategy.
–following vertical integration versus
outsourcing strategy.
–other examples?
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0%
5%
10%
20%
25%
Profit Margin
ROE=20%
0%
5%
10%
25%
30%
0 1 2 3 4 5 6 7 8 9 10 11
Turnover
Profit Margin
ROE=20%
Department Store
Trade-Off 1:
Partner
(commission
Margin vs. turnover tradeoff for
OSTK, AMZN, ROST, and MAY
0%
5%
10%
15%
20%
25%
30%
35%
0 1 2 3 4 5 6 7 8 9 10 11
Turnover
Profit Margin
ROE=10%
ROE=20%
May Department Stores
Overstock.com
Ross Stores
Amazon.com
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Basic DuPont Analysis