Oneof the biggest corporations in the S&P 500 is the Delta airlines.A DuPont analysis of the company will measure its assets by its grossbook rather than its net book value. The reason for this is so thatit produces a high return of equity. The three factor analysis wasalso considered. The three factors involved are the Asset turnover,profitability and leverage. To calculate the asset turnover therevenue is divided by the average assets while the profitability iscalculated by the net income divided by the revenue. The leverage onthe other hand is calculated by the average assets divided by theaverage equity. As at March 31st2014 the profit of delta airlines was at 10.45B the revenue per yearwas also 37.64B total assets is 0.000052252B while their totalstakeholder equity was 0.000011643. For this reason, theirprofitability will be 10.45/37.64 which is 0.28. The total assetturnover will be 37.64/.000052252 which is 720355.2. The equitymultiplier will be .000052252 /.000011643 which is 4.5. The ROE isthus 907647.52.
Theirbiggest competitor is American Airlines Inc whose net profit for thelast fiscal year stood at $0.000008b, revenue per year stood at $6.1Btheir assets were 0.042278 and total stakeholder equity was0.00002731. For this reason, their profitability was 1.3115, theasset turnover was 144.27 and their leverage was 1548 thus the roe ofAAI is 292897.24
ROE=Profitability* Asset turnover * leverage
Thereason why DAL’s ROE is greater than that of AAI is because oftheir profit margin. This is a good sign as it shows healthy growthof the company. On the other hand, if the leverage or equitymultiplier of an organization is as high as AAI’s it shows that theorganization was already badly leveraged and things are thus morerisky.
Soliman,M. T., & Lundholm, R. J. (2003). Usingindustry-adjusted DuPont analysis to predict future profitability andreturns.