First Investment Inc.: Analysis of Financial Statements

721 Words Nov 24th, 2008 3 Pages
First Investment Inc.: Analysis of Financial Statements
Company Information
First Investments Inc owns stock of Basic Industries. Basic Industries is a diversified multinational corporation with major shares in various electrical related markets.
Financial Analysis
The financial analysis of the company is carried out using DuPont System of analysis.
DuPont Analysis [Ref:4]
There are two methods of DuPont Analysis, one is called three steps and other is called five steps DuPont Analysis.
Three Steps DuPont Calculation:
Step 1: Basic equation is very simple i.e.
ROE = net income / shareholders’ equity
Step 2: Taking ROE and multiplying the equation by (Sales/Sales), we get:
ROE = (net income / sales) * (sales / shareholder's
…show more content…
These are strike years so we will ignore them. In 1994, ROE is less than that of last three years. Overall its not good sign, but its explanation will be given in upcoming ratios.
Net Profit Margin Clearly, Net profit margin is decreased in 1994. In 1992 it was the highest then it is showing downward trend. It is the only cause which is lowering Return over Equity (ROE).
Equity Turnover Ratio Equity turnover rare is increasing. It means that company is producing more revenue with the investment.
Asset Turnover Ratio Asset turnover ratio is also increasing in 1994. It shows that total assets are being efficiently used in producing revenues.
Equity Multiplier Equity multiplier is also showing positive trend in 1993 and 1994. It shows that how efficiently shareholders equity is being used to make assets.
Operating Profit Margin It has similar trend of decline as explained in Net Profit Margin.
Interest Expense Rate Interest Expense Rate is continuously increasing from 1992 to onward. It shows that company is paying high financial charges over short term and long term borrowings.
Tax Retention Rate Tax retention rate is high in 1994 as compared to previous years. It means tax rates are reduced in 1994.
Conclusion
After analyzing all relevant ratios, it appears that decline in ROE is due to:
• Decrease in profit margin
Open Document