Conduct dupont decomposition of lucents roe

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Reference no: EM13890534

The Dupont analysis (Dupont model) is a ROE based financial ratio for assessing an ability of a company to increase its ROE. To conduct Dupont decomposition of Lucent's ROE we need to break it down in three components: Profit Margin, Asset Turnover and Equity Multiplier (Financial Leverage). Then we are going to assess them separately.

	Sep-97	Dec-97	Mar-98	Jun-98	Sep-98	Dec-98	Mar-99	Jun-99	Sep-99	Dec-99
Net Income	369	1124	186	518	647	1523	457	829	972	1175
Sales	6933	8724	6184	7642	8574	9842	8220	9315	10575	9905
Assets	23811	24752	24664	25279	26720	31641	32840	37156	38735	38634
Equity	3387	4671	5036	4922	5534	8437	9051	12403	13622	16079

	Sep-97	Dec-97	Mar-98	Jun-98	Sep-98	Dec-98	Mar-99	Jun-99	Sep-99	Dec-99
Profit Margin	0.05	0.13	0.03	0.07	0.08	0.15	0.06	0.09	0.09	0.12
Asset Turnover	0.29	0.35	0.25	0.30	0.32	0.31	0.25	0.25	0.27	0.26
Equity Multiplier	7.03	5.30	4.90	5.14	4.83	3.75	3.63	3.00	2.84	2.40
ROE	0.11	0.24	0.04	0.11	0.12	0.18	0.05	0.07	0.07	0.07

2154_Dupont analysis.png

The Dupont analysis (Dupont model) is a ROE based financial ratio for assessing an ability of a company to increase its ROE. To conduct Dupont decomposition of Lucent's ROE it has to be broken down into three components: Profit Margin, Asset Turnover and Equity Multiplier (Financial Leverage). Thereafter, they data should be analyzed individually.

	Sep-97	Dec-97	Mar-98	Jun-98	Sep-98	Dec-98	Mar-99	Jun-99	Sep-99	Dec-99
Net Income	369	1124	186	518	647	1523	457	829	972	1175
Sales	6933	8724	6184	7642	8574	9842	8220	9315	10575	9905
Assets	23811	24752	24664	25279	26720	31641	32840	37156	38735	38634
Equity	3387	4671	5036	4922	5534	8437	9051	12403	13622	16079

	Sep-97	Dec-97	Mar-98	Jun-98	Sep-98	Dec-98	Mar-99	Jun-99	Sep-99	Dec-99
Profit Margin	0.05	0.13	0.03	0.07	0.08	0.15	0.06	0.09	0.09	0.12
Asset Turnover	0.29	0.35	0.25	0.30	0.32	0.31	0.25	0.25	0.27	0.26
Equity Multiplier	7.03	5.30	4.90	5.14	4.83	3.75	3.63	3.00	2.84	2.40
ROE	0.11	0.24	0.04	0.11	0.12	0.18	0.05	0.07	0.07	0.07

Evaluate the seasonally adjusted change (i.e., quarter i in year t to quarter i in year t-1) in Lucent's: Sales, Accounts Receivable, Inventory and Gross Margin for the five quarterly periods: December 1998 through December 1999. Be sure to include an evaluation of the Footnote disclosures regarding Lucent's inventories in your examination. Does the explanation for the earnings shortfall provided by Lucent's managers make sense in light of your analysis?

	Variance vs LY	Variance vs LY	Variance vs LY	Variance vs LY	Variance vs LY
Total Revenues	1%	23%	22%	33%	13%
Gross Margin	-11%	18%	26%	42%	24%
Net Income	-23%	50%	60%	146%	35%
Account Receivables	10%	50%	64%	57%	46%
Inventory	42%	64%	74%	51%	45%
Allowance for bad debt	10%	-7%	5%	-5%	1%

1646_Dupont analysis1.png

An issue with inventories was definitely a problem however this is not showing the complete reality of the company. It is true Inventories are a big part of the problem since sales decreased due to a shift in demand and they build a lot of inventory to show more assets, but also they decrease Net income due to higher cost of sales and an increase in receivables.

Reference no: EM13890534

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