The Du Pont System of the Analysis of Return Ratios

Applied to Sears, Roebuck & Co.

Return on Assets (ROA)1
Calculation for fiscal year 2003
Return on assets = ( total asset turnover )

Return on Equity (ROE) 2

Calculation for fiscal year 2003

(net profit margin)

Return on equity = ( total asset turnover )

( net profit margin)( equity multiplier )

net profit sales net profit = total assets total assets sales $3,397 $41,124 $3, 397 = $27,723 $27, 723 $41,124 0.1225 = (1.4834 times ) Check on your work: 12.25% = 12.25%

net profit sales net profit total assets = equity total assets sales equity $3,397 $41,124 $3, 397 $27, 723 = $6,401 $27, 723 $41,124 $6, 401 0.5307 = (1.4834 times ) Check on your work: 53.07% = 53.07%

( 0.08260 )

( 0.0826 ) ( 4.3310 )

Try it for 2002: Return on assets = 2.73%

Try it for 2002: Return on equity = 20.38%

net profit net profit sales = total assets sales total assets

net profit sales = total assets equity

net profit total assets equity sales

Du Pont Analysis example (P. Peterson)

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Using the DuPont Breakdown

Comparing 2002 and 2003: Year Return on equity Return on assets Total asset turnover Net profit margin Equity multiplier 2003 53.07% 12.25% 1.4834 times 8.26% 4.3110 times 2002 20.38% 2.73% 0.8206 times 3.326% 7.4647 times

Why the change in return on assets from 2002 to 2003? o Increase in its profit margin. o Increase in its asset turnover (due primarily to a reduction in assets through the sale of credit card receivables in 2003 to Citigroup at a $6 billion profit). Why the change in return on equity from 2002 to 2003? o Increase in its profit margin. o Increase in its asset turnover (due primarily to a reduction in assets through the reduction in credit card receivables by selling them to Citigroup at a $6 billion profit). o Reduction in long-term debt (from some of the proceeds from the sale of its credit card receivables) and in increase in equity from the profit on the sale of the receivables.

Du Pont Analysis example (P. Peterson)

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SEARS, ROEBUCK AND CO. Consolidated Statements of Income millions, except per common share data REVENUES Merchandise sales and services Credit and financial products revenues Total revenues COSTS AND EXPENSES Cost of sales, buying and occupancy Selling and administrative Provision for uncollectible accounts Depreciation and amortization Interest, net Loss on early retirement of debt, net Special charges and impairments Total costs and expenses Operating income Gain on sale of businesses Other income, net Income before income taxes, minority interest and cumulative effect of change in accounting principle Income taxes Minority interest Income before cumulative effect of change in accounting principle Cumulative effect of change in accounting for goodwill NET INCOME $ 26,231 9,111 1,747 909 1,025 791 112 39,926 1,198 4,224 27 5,449 2,007 45 3,397 -3,397 $ 25,646 9,249 2,261 875 1,143 -111 39,285 2,081 -372 2,453 858 11 1,584 (208) 1,376 $ 26,234 8,892 1,866 863 1,415 -542 39,812 1,178 -45 1,223 467 21 735 -735 2003 $ 36,372 4,752 41,124 $ 2002 35,698 5,668 41,366 $ 2001 35,755 5,235 40,990

Source: Sears, Roebuck & Co. www.sears.com

Du Pont Analysis example (P. Peterson)

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SEARS, ROEBUCK AND CO. Consolidated Balance Sheets millions, except per share data ASSETS Current assets Cash and cash equivalents Credit card receivables Less allowance for uncollectible accounts Net credit card receivables Other receivables Merchandise inventories, net Prepaid expenses and deferred charges Deferred income taxes Total current assets Property and equipment Land Buildings and improvements Furniture, fixtures and equipment Capitalized leases Gross property and equipment Less accumulated depreciation Total property and equipment, net Deferred income taxes Goodwill Tradenames and other intangible assets Other assets TOTAL ASSETS 2003 2002

9,057 1,998 42 1,956 733 5,335 407 708 18,196

1,962 32,563 1,832 30,731 891 5,115 535 749 39,983

392 7,151 4,972 609 13,124 6,336 6,788 378 943 710 708 27,723

442 6,930 5,050 557 12,979 6,069 6,910 734 944 704 1,134 50,409 Source: Sears, Roebuck & Co. www.sears.com

Du Pont Analysis example (P. Peterson)

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LIABILITIES Current liabilities Short-term borrowings Current portion of long-term debt and capitalized lease obligations Merchandise payables Income taxes payable Other liabilities Unearned revenues Other taxes Total current liabilities Long-term debt and capitalized lease obligations Pension and postretirement benefits Minority interest and other liabilities Total Liabilities COMMITMENTS AND CONTINGENT LIABILITIES SHAREHOLDERS' EQUITY Common shares issued ($. 75 par value per share, 1,000 shares authorized, 230.4 and 316.7 shares outstanding, respectively) Capital in excess of par value Retained earnings Treasury stock - at cost Deferred ESOP expense Accumulated other comprehensive loss Total Shareholders' Equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

1,033 $ 2,950 3,106 1,867 2,950 1,244 609 13,759 4,218 1,956 1,389 21,322

4,525 4,808 2,945 787 3,753 1,199 580 18,597 21,304 2,491 1,264 43,656

323 323 3,519 3,505 11,636 8,497 (7,945) (4,474) (26) (42) (1,106) (1,056) 6,401 6,753 $ 27,723 $ 50,409 Source: Sears, Roebuck & Co. www.sears.com

Du Pont Analysis example (P. Peterson)

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