Strategy @ work 5.1 STRATEGIC FINANCIAL ANALYSIS AND DU PONT ANALYSIS
A strategic financial analysis should always ® I assess the following ratios over a period of at least three years to be able to form a minimal strategic financial assessment of organisational performance. The worked Du Pont analysis below provides the integrated operational financial analysis that underlies the strategic ratios we discuss here.
1 Growth
Sales growth IS the best indicator of volume growth. We want to know annual growth rates, not simply the difference between sales at the start of the period and sales at the end. Be wary of acquisitions of divestments which artificially inflate or deflate the recorded performance in a particular year. Compare the annual results with the rate of inflation, to see if real growth is occurring, and with industry growth rates, to see if I the organisation is growing faster or slower than I the industry.
2 Shareholder return
Where relevant, start with total sharemarket return. Be careful that the same number of shares is being used in the calculation each year. Such a return should be compared with the share Price Accumulation Index, which includes dividend I effects, to see how the company has performed against the average. Comparison with industry averages would also be useful, if there is an appropriate industry index.
Return on shareholders' funds/equity (ROSF/ I ROE) is the appropriate accounting measure and is much more easily available than total I sharemarket return. Use profit after tax (PAT), but before extraordinaries and abnormals, unless these are a consistent feature (as they often are). If minorities are significant, adjust both the profit J and the equity to exclude minorities. Strictly, this year's PAT should be compared with the average equity for the year. However, the standard practice is to compare to year-end equity. For fast growing companies, this significantly understates I the performance. Many organisations have a rule of thumb of seeking a 15% after-tax return on equity.