Whole Foods Dupont Analysis
DuPont Analysis breaks out ROE into 3 sub-components: Profit Margin, Total Asset Turnover and Equity Multiplier. Maximizing some/all of these subcomponents would result in a better ROE.
The ‘Profit Margin’ ratio is a measure of operational efficiency of a firm. Ideal value for this ratio is 100%, which can be achieved if Sales are equal to Net Income. However, in the business that Whole Foods is in, this ratio will not be anywhere near 100%.
One place Whole Foods can increase ‘Profit margin’ is by lowering their Cost of Sales. According to Whole Foods’ Income Statement, Cost of Sales is roughly 62% of Net Income. When we decrease Cost of Sales by 1%, we observe that the ‘Profit Margin’ moves from 2.9% to 3.52%, and ROE moves from 9.98% to 12.12%. Whole Foods should look at reducing this number.
2003 2004 2005 2006 2007
Net Income ($ million) 103.7 137.1 136.4 203.83 182.74
Cash Dividends ($ million) 0 28.7 57.08 342.04 121.14
Total Assets ($ million) 1,196.80 1,519.80 1,889.30 2,043.00 3,213.13
Total Equity ($ million) 776.20 988.40 1,365.70 1,404.14 1,458.80 b 1 0.79 0.58 -0.63 0.35
ROA 8.66% 9.02% 7.22% 9.98% 5.69%
ROE 13.36% 13.87% 9.99% 14.52% 12.53%
Internal Growth Rate 9.4% 7.68% 4.38% -5.94% 2.05%
Sustainable Growth Rate 15.42% 12.32% 6.17% -8.42% 4.63%
The ‘Total Asset Turnover’ ratio is a measure of a firm’s asset use efficiency. This ratio is important since Whole Foods is in a business where it handles substantial amount of perishable goods. Hence the asset turnover should be high. Whole Foods’ asset turnover for 2004 and 2005 was 2.54 and 2.49 respectively. One approach they can take to improve asset turn over is by increasing sales. When we increase sales by 1% (assuming everything else remains equal), then we notice that ‘Total Asset Turnover’ increases to 2.51 (from 2.49), ‘Profit Margin’ increases to 3.86 % (from 2.9%) and the ROE increases by 3.44% to 13.42%. Whole Foods could improve ROE by increasing the Asset Turnover.
The ‘Profit Margin’ ratio is a measure of operational efficiency of a firm. Ideal value for this ratio is 100%, which can be achieved if Sales are equal to Net Income. However, in the business that Whole Foods is in, this ratio will not be anywhere near 100%.
One place Whole Foods can increase ‘Profit margin’ is by lowering their Cost of Sales. According to Whole Foods’ Income Statement, Cost of Sales is roughly 62% of Net Income. When we decrease Cost of Sales by 1%, we observe that the ‘Profit Margin’ moves from 2.9% to 3.52%, and ROE moves from 9.98% to 12.12%. Whole Foods should look at reducing this number.
2003 2004 2005 2006 2007
Net Income ($ million) 103.7 137.1 136.4 203.83 182.74
Cash Dividends ($ million) 0 28.7 57.08 342.04 121.14
Total Assets ($ million) 1,196.80 1,519.80 1,889.30 2,043.00 3,213.13
Total Equity ($ million) 776.20 988.40 1,365.70 1,404.14 1,458.80 b 1 0.79 0.58 -0.63 0.35
ROA 8.66% 9.02% 7.22% 9.98% 5.69%
ROE 13.36% 13.87% 9.99% 14.52% 12.53%
Internal Growth Rate 9.4% 7.68% 4.38% -5.94% 2.05%
Sustainable Growth Rate 15.42% 12.32% 6.17% -8.42% 4.63%
The ‘Total Asset Turnover’ ratio is a measure of a firm’s asset use efficiency. This ratio is important since Whole Foods is in a business where it handles substantial amount of perishable goods. Hence the asset turnover should be high. Whole Foods’ asset turnover for 2004 and 2005 was 2.54 and 2.49 respectively. One approach they can take to improve asset turn over is by increasing sales. When we increase sales by 1% (assuming everything else remains equal), then we notice that ‘Total Asset Turnover’ increases to 2.51 (from 2.49), ‘Profit Margin’ increases to 3.86 % (from 2.9%) and the ROE increases by 3.44% to 13.42%. Whole Foods could improve ROE by increasing the Asset Turnover.