Review

Dupont method:

Economic profitability: be able to contoll expenses and cost, to maintain profits and the
financial effect.

Financing effect: raise debt, to get leveraage in order to use other people money to produce
profits for your own

Fiscal effect: not paying much taxes, try to pay as little as possible under the law.
Net profit / (EBT) Earnings before taxes.
*Can be measure if we relate how much net profit remains after decucing tax from EBT,
the higher it is, the better effect of the cpmpany fiscal policy.

Return on equity = (return on assets)x(assets/hareholder’s equity)

Return on assest= (Net profit margin)x(Total assests turnover)

* Net profit margin: profit as a percentage of sales

Net Profit Margin = Sales/ Net income

Total assests turnover= Sales/ Total assets

Net Income= Sales – Total cost

* If we are understanding net income we need to to know were it comes from, if the
sales improve it is the maximun thing we need to do. If costs are not under controll the
expenses can reach the sales, than it is needed to sell more in order to overcome the costs and
expenses.

Total assests: Fixed assets + Current assets.

*Fixed assets are needed to operate as machinery, land, human capital ,equioment.
Current assest make companies more efficient, for example, cash, accounts receivable,
inventory, between others.

If cost of debt and debt structure are correct = their multiplication must be greater than 1;
meaning that financial leverage is producing the shareholders wealth.

Working capital= Money that is easily available that is used to pay off whatever we owe in the
short term.
*If the result it is positivy it means the company has solvency and is able to pay debts, if
it is negative is not able to cover its debts or low solvency.
NWC = current assets – short term debt
 CCC is comformed by trhee main components.
CCC = AAI + ACP – APP
AAI= Average age of inventory (inventory turnover)
ACP= Average collection period (turnover of accounts receivable)
APP= Average payment period
The smaller the better

Rceivable turnover ratio =net credit sales /average net receivables

* Represents the number of timer the commercial cycle is fulfilled in the period to which
credit sales refer.

Average collection period = 360 / receivables accounts turnover

* Indicates the average period requires to collect outstanding accounts.
Average collection days = Average collection period

Inventory turnover ratio= COGS / average inventory

*Indicates the rate at which the company sells and replaces its stock of goods during a
particular period.
When estimating a target inventory is divided by the taget not the average inventory.
Times

Average age of inventory= 360 / inventory turnover

* The average inventory is the averge number of days it takes for a firm to sell off its
inventory.
Days

Accounts payable turnover= Purchases made on credit/ Average accounts payable balance
*Measure used to quantify the rates at which a company pays off its supplier.

Average payment period = 360/ Accounts payable turnover

*Indicates the number of days a company takes to pay off credit purchases.
When estimating a target inventory is divided by the taget.

NNWC = (CCC X Average daily spending) + MCB

NNWC = Necessary net working capital
MCB = Minimum cash balance
*Usually 10% suppliers balance and other significative payments (third party obligations;
anything that makes you sell)

Cash management strategies:

  Delay of Accounts Payable: Cover accounts payable as late as possible without
damaging the company's credit position but taking advantage of any favorable cash
discount.
 Efficient Inventory-Production Management: Use inventory as quickly as possible to
avoid stocks that could result in the production line's closure or a loss of sales.
 Accelerate account collection: Collect outstanding accounts as quickly as possible,
without losing future sales due to too fast collection procedures.

Impact on profitability:

Changes caused by inventory reduction

Reduction in current assets => reduction in TA
Changes at DuPont:
• Increase of inventory turnover
• Increase CA turnover
• Increase TA turnover
• Increase return on assets – increase in ROE
• Decrease in debt structure can lower the leverage effect

Changes caused by the reduction of NNWC

• Cost reduction => increased profitability

Impact on profitability:

Changes caused by the reduction of accounts receivable

Reduction in current assets => reduction in TA
Changes at DuPont::
• Increase of accounts receivable turnover
• Increase CA turnover
• Increase TA turnover
• Increase return on assets and increase in ROE
• Low debt structure can lower the leverage effect

Changes caused by the reduction of NNWC

• Cost reduction => increased profitability

Changes caused by the increase in accounts payable

Increase in current liabilities
Changes at DuPont:
• Higher debt structure may increase the effect of leverage but at the expense of more
risk.
Changes caused by the reduction of NNWC
• ¿Need for financing? => cost increase
• Increase in costs => decrease in profitability