The Financial Cockpit: Three Levers and One Flight Plan

5 Pages Posted: 30 May 2017 Last revised: 27 Nov 2018

See all articles by Mark E. Haskins

Mark E. Haskins

University of Virginia - Darden School of Business

Abstract

This case focuses on the use and interpretation of the DuPont model financial ratios, in particular the following four: return on sales, asset turnover, financial leverage, and return on equity. Students consider how these ratios are used to assess a company's financial performance for a single year, over time, and in comparison with other companies within and outside the focal company's industry. They also learn how these ratios provide insight into a company's business model via the margins it is able to earn, the productivity with which it uses its assets, and the company's aggressiveness (or lack thereof) in using borrowed money to finance its operations.The case is rooted in the basic premise that “ROE is the ratio most commonly used to analyze profitability of a business” and it is “important to both current and prospective shareholders.” Furthermore, in the context of the DuPont model, the case positions ROE as the product of the other three ratios noted above. Thus, the protagonist in the case, Jill Keyes, has gravitated to the DuPont model. The case ends with a set of questions that Jill Keyes has left for her follow-up—these provide the basic assignment for students.

Excerpt

UVA-C-2313

Rev. Nov. 2, 2018

The Financial Cockpit: Three Levers and One Flight Plan

Jill Keyes, a nonfinancial product specialist at Craftsman Furniture, Inc. (CFI), was interested in selecting a handful of financial ratios that would enable her to quickly and insightfully highlight some of the fundamental differences among companies' financial results. She was wondering how CFI compared with other companies, and she was also interested in some initial financial screening that she could use to identify a handful of small, healthy companies with which CFI might want to partner in the future. Moreover, if the few select ratios she settled on also pointed to some of the fundamental differences among companies' business models, that would be even better. At that moment, she did not have the time to undertake an extensive, data-intensive statistical-modeling research study—she just wanted some basic insights that she could easily access and use to compare and contrast how companies generated returns for their shareholders.

She recalled from her college days learning about the DuPont financial ratios model in an introductory business course. She wondered if she could find her course notes and if those DuPont ratios would provide the succinct, provocative insights she was after. And wouldn't it be great if yearly amounts for those ratios were publicly available across a spectrum of companies?

Resurrecting the DuPont Model Ratios

. . .

Keywords: Dupont ratio, asset turnover, return on sales, financial leverage, return on equity, financial ratios

Suggested Citation

Haskins, Mark E., The Financial Cockpit: Three Levers and One Flight Plan. Darden Case No. UVA-C-2313, Available at SSRN: https://ssrn.com/abstract=2974016

Mark E. Haskins (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924 -4826 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/haskins.htm

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