Duopont Identity

Performance Analysis (DuPont):

We have used DuPont identity to decompose and analyze the financial ratio of return on equity (ROE) for Cineplex. We used ROE to explain the Cineplex's earnings in the financial year of 2011 with the total amount of owner's equity invested in the company. We are comparing 2011 ratios with financial ratios of 2010 as well as with industry ratios to have a better and in depth comparison of the organization. We have also identified and explained the underlying drivers of ROE.

To begin with the DuPont analysis we have calculated the return on equity which comes out to be 8.1% (ROE = Net Income/ Average Total Equity) which is slightly lower than 8.4% which was reported by the Cineplex in 2010. The decrease has been by caused year over increase of 4.5% in the total equity and by 2 percent decrease in the net income. The industry return of 8.2% shows that ROE of Cineplex is at par with the industry, Cineplex is providing average return to its equity investors. ROE has been be further decomposed into ROA and Financial leverage to understand the drivers of 8.1%. The financial leverage figures of Cineplex are lower (2.086) than the industry average (2.19%). This shows that Cineplex can easily acquire more loan from financial institutes to invest in buying more assets. ROA for Cineplex in 2011 (3.9%) higher than the Industry average (3.8%) but lower than 2010 ROA (4.0%) which shows that Cineplex is more efficient than its competitors in utilizing its assets.

To further drill into the drivers of high ROA we have divided the return on assets into two parts- Asset Turnover and Profit Margins. We figured that the primary driver for high ROA for Cineplex is its asset turnover ratio which is quite higher than the industry average (4.9%) for the financial year of 2011 (7.8%) and 2010 (7.8%) which basically mean that Cineplex is generating high revenue on each dollar of asset. On the other hand the profit margin of Cineplex is low (4.9% for 2011 and 5.0% for 2010) as compare to the industry average of 7.1% but its decent for entertainment industry.

So by putting all these ratios together we get the DuPont analysis

ROE = Profit Margin * Asset Turnover * Financial Leverage

To know a little bit more about the return on equity, we did the extended DuPont Analysis and broke Profit Margin into its own component parts (Tax Burden, Interest burden and EBIT Margin), giving us an even finer level of detail to explore.

Tax Burden indicates of how much the company is paying in taxes. As per the 2011 financials Cineplex kept 63% of every dollar it made after deducting all the expenses. Due to the high debt Cineplex has they