Accounting Conservation - Du Pont analysis

May 12th, 2015
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Michigan State University
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Prudence concept: revenue and profits are included in the balance sheet only when they are realized(or there is reasonable 'certainty' of realizing them) butliabilities are included when there is a reasonable 'possibility' of incurring them. Also called conservation concept.

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conservationPrudence concept: revenue andprofitsare included in thebalance sheetonly when they arerealized(or there isreasonable'certainty' of realizing them) butliabilitiesare included when there is a reasonable 'possibility' of incurring them. Also calledconservation concept.Du Pont analysisA type ofanalysisthat examines a company'sReturn on Equity (ROE)by breaking it into three maincomponents:profit margin,asset turnoverandleveragefactor. By breaking theROEinto distinctparts,investorscan examine how effectively acompanyis usingequity, since poorly performing components will drag down the overall figure. To calculate afirm'sROE through Du Pont analysis, multiply theprofitmargin(net incomedivided bysales),assetturnover(sales divided by assets) and leverage factor (total assetsdivided byshareholders' equity) together. The higher theresult, the higher thereturnon equity.Return on EquityROE. Ameasureof how well acompanyused reinvestedearningsto generate additional earnings, equal to afiscal year'safter-taxincome(afterpreferred stockdividendsbut before commonstock dividends) divided bybook value, expressed as apercentage. It is used as a general indication of the company'sefficiency; in otherwords, how muchprofitit isableto generate given theresourcesprovided by itsstockholders.investorsusually look for companies withreturnsonequitythat arehighand growing.Net Working CapitalNet Working Capital, is defined

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