Assignment 5-A: DuPont Model Analysis for Netflix
a. For each ratio in the Basic Dupont Model and the Advanced Dupont Model, provide an interpretation, i.e., are they favorable or unfavorable, is the 5-year trend positive or negative? Note that our reclassifications in 2008 and 2009 do not have an effect on the Dupont ratios. b. Are any of these ratios meaningless because of factors such as negative amounts, denominator close to zero, accounting distortions? c. Are there any factors that make you think the 2008 or 2009 ratio is an aberration and that the future may be significantly different? Guidance: To determine whether the ratios are favorable or unfavorable, we need to have some benchmarks for comparison, e.g., prior years’ ratios for the same company, the ratios of similar companies in the same industry, absolute measures such as whether ROE is equal to or greater than the company’s cost of capital, is the company growing as fast as the rest of its industry or the economy as a whole. In addition, we need to keep in mind that the ratios are distorted by any accounting errors that we have not corrected, e.g., if assets have been omitted or are understated on the B.S., then stockholders’ equity is also understated and this will cause the key performance measures, ROE and ROI, to be overstated. Since our two companies are somewhat unique, we have some difficulty identify peer companies for comparison…to what extent is a comparison of the Netflix to the Blockbuster ratios useful?
a) Net Profit margin -The profit margin is a key performance indicator as it extends all the way to th ebottom line of the income statement. For netflix, its been gradually increasing each year since 2006 and appears to be favroable Total Asset Turnover –This is a good indicator of how the company is managing its sales and purchases of assets. A smaller total worth of assets is favorable as long as its paired with high sales. A higher...
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