First, the defects of the traditional DuPont financial analysis system
The traditional DuPont financial analysis system generally decomposes the ROE according to the following model:
Return on net assets = net interest rate of total assets × equity multiplier = net profit rate of sales × turnover rate of total assets × equity multiplier
There are some defects in the traditional DuPont financial analysis system, which are mainly reflected in the following three aspects:
1. In the traditional system, the net profit, the final operating result of an enterprise, is used to measure the income of the enterprise. The calculation of net profit should not only deduct the operating cost, but also deduct the financing cost, that is, interest expense and income tax. Therefore, the net profit rate of sales and total assets are not only affected by the operating efficiency, but also by the financial policy and income tax rate. When the change of net profit rate of sales or net profit rate of total assets leads to the change of return on net assets, it is difficult to distinguish which is the influence of the change of operating efficiency, which is the influence of the change of financial policy and which is the influence of the change of income tax expenditure, and so on.
2. The net interest rate of total assets lacks logical consistency. The numerator "net profit" of this indicator is the income owned by shareholders, and the denominator "total assets" includes the capital contributions of shareholders and creditors, which are inconsistent.
3. In the traditional system, the equity multiplier is used to reflect the influence of the enterprise's capital structure on the return on net assets, but the equity multiplier only reflects the degree of debt and cannot directly reflect the resulting debt cost and financial risk. If debt cost and financial risk are not considered, as long as debt is borrowed, the equity multiplier will be greater than 1, which will promote the improvement of return on net assets. The greater the debt ratio, the greater the equity multiplier, and the stronger the promotion effect. In fact, when an enterprise increases the debt ratio, that is, the equity multiplier, the increase of the debt ratio will inevitably lead to the increase of interest expenses, thus reducing the net interest rate of sales and the net interest rate of assets. It can be seen that the traditional system indirectly reflects the debt cost and financial risk through the reverse change effect between this equity multiplier and the net interest rate of sales or assets. However, it is not intuitive to reflect the debt cost and financial risk, because the net profit rate of sales or the net profit rate of total assets are affected by both operating efficiency and financial policy. Although the net profit rate of sales or net profit rate of assets will decrease after the equity multiplier increases, it is difficult for the traditional system to distinguish the decrease caused by the increase of interest expenses from the decrease caused by the change of operating efficiency.
Second, the improvement of the traditional DuPont financial analysis system.
1. earnings before interest and tax is used to measure corporate income instead of net profit. On this basis, the traditional net interest rate of total assets and net interest rate of sales are replaced by the total return rate of assets (total assets in earnings before interest and tax) and the profit rate before interest and tax on sales (earnings before interest and tax+sales revenue). First of all, earnings before interest and tax are undistributed pure operating income, which is completely determined by operating efficiency and is not affected by financial policies. Therefore, the impact of total return on assets and profit margin before interest and tax on sales only involves the factors of operating efficiency. Secondly, the income before interest and tax should be deducted from the interest expense to get the net profit, so that the income tax factor can be included in DuPont's financial analysis system. Thirdly, because the change of equity multiplier belongs to the change of financial policy, it will not lead to the change of total return on assets and profit rate before interest and tax, so we can clearly distinguish the influence of operating efficiency factors and financial policy factors on return on net assets. In addition, return on total assets's molecular "earnings before interest and tax" includes the income of shareholders and creditors, and the denominator "total assets" includes the contributions of shareholders and creditors, which is more logical than the net interest rate of total assets, which also improves the scientific nature of DuPont's financial analysis system.
2. The reciprocal of financial leverage is introduced into the traditional system to reflect the influence of debt cost and financial risk on ROE, so as to make up for the defect that the equity multiplier ignores debt cost and financial risk. The degree of financial leverage appears in the form of reciprocal in the improved system, which can be regarded as the deduction of equity multiplier. When the debt ratio increases and the equity multiplier increases, the increase of interest expense will lead to the synchronous increase of financial leverage, thus offsetting the beneficial impact of the increase of equity multiplier and reflecting the negative impact of debt cost and financial risk on the return on net assets.
According to the above ideas, we can decompose DuPont's financial analysis system as follows:
Three, improve the analysis of DuPont financial analysis system
The above-mentioned improved system shows that the return on net assets is affected by the profit rate before interest and tax, asset turnover rate, equity multiplier, financial leverage and income tax rate.
1, the profit rate before sales interest and tax and the turnover rate of total assets reflect the influence of enterprise operating efficiency on the return on net assets, and reflect the effect of enterprise investment and business decision. The former represents the operating profitability of sales revenue, while the latter represents the operating efficiency of total assets, and the total return on assets is obtained by multiplying the two, which is a comprehensive embodiment of the operating efficiency of enterprises. The way to improve the profit rate before interest and tax is to increase sales revenue and reduce operating costs. The improvement of total assets turnover depends on increasing sales revenue and disposing of idle assets. Different combinations of profit rate before interest and tax and total assets turnover rate can also reflect the business policy of enterprises, such as "small profits but quick turnover"-lower profit rate before interest and tax, higher total assets turnover rate, and "more profits than sales"-higher profit rate before interest and tax and lower total assets turnover rate.
2. The equity multiplier and the degree of financial leverage reflect the influence of the company's financial policy on the return on net assets and the effect of the company's financing decision. The former reflects the enterprise's capital structure policy, while the latter reflects the debt cost and financial risk level determined by the enterprise's capital structure policy. The meaning of the ratio of equity multiplier to financial leverage is: first, borrowing may not promote the increase of ROE, but only when the equity multiplier is greater than financial leverage, that is, the ratio of the two is greater than 1, and if the equity multiplier is less than financial leverage, borrowing will reduce ROE; Secondly, simply increasing the debt ratio, that is, increasing the equity multiplier, may not necessarily improve the return on net assets. Only when the increase of equity multiplier is greater than the increase of financial leverage caused by it, will it be beneficial to improve the debt ratio.
The condition that the equity multiplier is greater than the degree of financial leverage can be deduced as follows:
Therefore, only when return on total assets is higher than the average interest rate of debt, borrowing or increasing the debt ratio can promote the increase of return on net assets. Under normal circumstances, the debt interest rate is fixed, but the return on total assets that an enterprise can create is uncertain. Using the uncertain return on total assets to offset the fixed debt interest rate will lead to greater uncertainty in the return on net assets that shareholders can obtain, which is the root of financial risks. Therefore, when borrowing money, enterprises must carefully consider the level and stability of their own operating profitability, reasonably predict the possibility and extent of return on total assets's higher debt interest rate, and avoid bearing excessive debt costs and financial risks. In addition, within a reasonable range, using interest-free debt such as commercial credit as much as possible can also reduce the average interest rate of debt, thus increasing the ratio of equity multiplier to financial leverage, and further promoting the return on net assets.
3. The income tax rate belongs to the external factors of the enterprise. Enterprises should actively carry out tax planning, reduce the income tax burden and improve the return on net assets. Let's take G Admiralty (000060) as an example to compare the differences before and after the improvement of DuPont's financial analysis system.
G Compared with 2003, the return on equity of CICC increased significantly CICC 2004. The main reason for the increase is not only the increase of profit rate before interest and tax and total assets turnover rate, but also the change of equity multiplier and financial leverage. Compared with 2003, the equity multiplier in 2004 decreased. According to the traditional system, this is an adverse impact on the return on net assets, reflecting poor financial policies. However, according to the improved system, it can be seen that although the equity multiplier decreased in 2004, the degree of financial leverage in 2004 decreased even more, indicating that the company greatly saved interest expenses and reduced financial risks in 2004, so that the ratio of equity multiplier to financial leverage in 2004 was significantly higher than that in 2003, which promoted the improvement of return on net assets. Therefore, reducing the debt ratio of gold in G in 2004 is a favorable change in fiscal policy.
In 2005, the return on net assets continued to rise sharply on the basis of 2004. According to the traditional DuPont financial analysis system, the main reason for the increase is the increase of net profit rate of sales, followed by the increase of total assets turnover rate, that is, the increase of return on net assets in 2005 is mainly attributed to the improvement of operating efficiency, especially the improvement of sales profitability. According to the improved DuPont financial analysis system, the profit rate before interest and tax on sales of G Jinzhong Company did not increase much in 2005, but the average income tax rate decreased significantly. It can be inferred that the increase of ROE in 2005 was not mainly due to the improvement of operating efficiency, but the result of a sharp drop in income tax expenses.