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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
Profit Margin
0.05
0.13
0.03
0.07
0.08
0.15
0.06
0.09
0.12
Asset Turnover
0.29
0.35
0.25
0.30
0.32
0.31
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
0.18
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.
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
Total Revenues
1%
23%
22%
33%
13%
Gross Margin
-11%
18%
26%
42%
24%
-23%
50%
60%
146%
35%
Account Receivables
10%
64%
57%
46%
Inventory
74%
51%
45%
Allowance for bad debt
-7%
5%
-5%
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.
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