Basic Industries
Sir,
To understand how the Basic Industries has achieved its return on equity over the past ten years, I have prepared Du Pont Analysis (Exhibit I). Return on Equity (without minority interest) has declined from 16.04% in 1985 to 17.47% in 1994. The main reason for the decline seems to be fall in Return on assets from 8.26% in 1985 to 6.87% in 1994. Therefore, Basic Industries has not been able to utilize its assets properly to produce its earnings. The fall in Return on Asset has been to an extent off-set by higher use of Debt. The same can be seen by higher Financial Leverage Multiplier of 2.5 as compared to 2.04 and through higher Debt Equity Ratio (Exhibit II).. Also, as most of the debt in short term in nature, Basic Industries Interest Coverage as fallen to 6.55 in 1994 from 26.18 in 1985.
The fall in Return on Assets can be attributed to fall in Net Profit Margin. Net Profit Margin has fallen from 5.71% in 1985 to 4.61% in 1994. Fall in Net Profit Margin has been partially off-set by higher Asset Turnover Ratio of 1.51 in 1994 as compared to 1.44 in 1985.
The fall in Net Profit Margin can be attributed to fall in Gross Profit Margin. Company’s Gross Profit Margin has fallen to 24.42% in 1994 as compared to 28.40% in 1995. Therefore, Basic Industries has not been able to control its cost and their costs are rising. However, company has been able to manage its taxes very well. Also, due to higher use of fixed cost and interest expense it’s Degree Operating and Financial Leverage has risen causing a negative effect on Net Profit Margin.
If we compare the 1993-94 period, Return on Equity has fallen from 18.36% in 1993 to 17.47% in 1994. The main reason is fall in return on asset from 7.44% to 6.87%. Partially, the fall in return on asset has been off-set by higher financial leverage multiplier. Return on asset has fallen mainly due to fall in net profit margin. The same is due to higher costs, better tax management and higher presence of fixed and
To understand how the Basic Industries has achieved its return on equity over the past ten years, I have prepared Du Pont Analysis (Exhibit I). Return on Equity (without minority interest) has declined from 16.04% in 1985 to 17.47% in 1994. The main reason for the decline seems to be fall in Return on assets from 8.26% in 1985 to 6.87% in 1994. Therefore, Basic Industries has not been able to utilize its assets properly to produce its earnings. The fall in Return on Asset has been to an extent off-set by higher use of Debt. The same can be seen by higher Financial Leverage Multiplier of 2.5 as compared to 2.04 and through higher Debt Equity Ratio (Exhibit II).. Also, as most of the debt in short term in nature, Basic Industries Interest Coverage as fallen to 6.55 in 1994 from 26.18 in 1985.
The fall in Return on Assets can be attributed to fall in Net Profit Margin. Net Profit Margin has fallen from 5.71% in 1985 to 4.61% in 1994. Fall in Net Profit Margin has been partially off-set by higher Asset Turnover Ratio of 1.51 in 1994 as compared to 1.44 in 1985.
The fall in Net Profit Margin can be attributed to fall in Gross Profit Margin. Company’s Gross Profit Margin has fallen to 24.42% in 1994 as compared to 28.40% in 1995. Therefore, Basic Industries has not been able to control its cost and their costs are rising. However, company has been able to manage its taxes very well. Also, due to higher use of fixed cost and interest expense it’s Degree Operating and Financial Leverage has risen causing a negative effect on Net Profit Margin.
If we compare the 1993-94 period, Return on Equity has fallen from 18.36% in 1993 to 17.47% in 1994. The main reason is fall in return on asset from 7.44% to 6.87%. Partially, the fall in return on asset has been off-set by higher financial leverage multiplier. Return on asset has fallen mainly due to fall in net profit margin. The same is due to higher costs, better tax management and higher presence of fixed and