Whole Foods Dupont Analysis free essay sample

Maximizing some/all of these subcomponents would result in a better ROE. The ‘Profit Margin’ ratio is a measure of operational efficiency of a firm. Ideal value for this ratio is 100%, which can be achieved if Sales are equal to Net Income. However, in the business that Whole Foods is in, this ratio will not be anywhere near 100%. One place Whole Foods can increase ‘Profit margin’ is by lowering their Cost of Sales. According to Whole Foods’ Income Statement, Cost of Sales is roughly 62% of Net Income. When we decrease Cost of Sales by 1%, we observe that the ‘Profit Margin’ moves from 2. 9% to 3. 52%, and ROE moves from 9. 98% to 12. 12%. Whole Foods should look at reducing this number. 20032004200520062007 Net Income ($ million)103. 7137. 1136. 4203. 83182. 74 Cash Dividends ($ million)028. 757. 08342. 04121. 14 Total Assets ($ million)1,196. 801,519. 801,889. 302,043. 003,213. 13 Total Equity ($ million)776. 20988. 401,365. 701,404. 141,458. 80 b10. 790. 58-0. 630. 35 ROA8. 6%9. 02%7. 22%9. 98%5. 69% ROE13. 36%13. 87%9. 99%14. 52%12. 53% Internal Growth Rate9. 4%7. 68%4. 38%-5. 94%2. 05% Sustainable Growth Rate15. 42%12. 32%6. 17%-8. 42%4. 63% The ‘Total Asset Turnover’ ratio is a measure of a firm’s asset use efficiency. We will write a custom essay sample on Whole Foods Dupont Analysis or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page This ratio is important since Whole Foods is in a business where it handles substantial amount of perishable goods. Hence the asset turnover should be high. Whole Foods’ asset turnover for 2004 and 2005 was 2. 54 and 2. 49 respectively. One approach they can take to improve asset turn over is by increasing sales. When we increase sales by 1% (assuming everything else remains equal), then we notice that ‘Total Asset Turnover’ increases to 2. 51 (from 2. 49), ‘Profit Margin’ increases to 3. 86 % (from 2. 9%) and the ROE increases by 3. 44% to 13. 42%. Whole Foods could improve ROE by increasing the Asset Turnover. The ‘Equity Multiplier’ ratio is a measure of financial leverage for the firm. The ratio could be increased by taking out debt, but increased debt would result in reduced profit margin (due to increased interest expense) and thus lower ROE. Whole Foods should look to improve Profit Margin and Asset Turnover while maintaining its equity multiplier. Whole Foods has about 16% in cash, which it could use to lower costs, improve operations efficiency, and potentially spend on advertising to stimulate increased sales. It would advisable to invest in Whole Food for the long term, but would not invest in it for the short term. In the short term, the company profits will suffer because of increase in expenses after purchase of Wild Oats (a competitor). In the long term though, this provides an opportunity for Whole Foods to expand its brand. Whole Foods have lower ROE because they are not as leveraged as competitors. More debt increases ROE making competitors look more profitable than they really are. More debt increases bankruptcy risk. Low leverage is more desirable. Whole Foods is producing greater profit margins with very little debt. With its improved A/R turnover (reduced to half its 2006 values), steady increase in Stockholders Equity, and offering generous dividends, Whole Foods is a great stock buy for investors. The company is in great financial health.