I have found very interesting article – interesting not due to possible usefulness but due to typical complete misunderstanding of the market and economy. Well, the author learns us how to become rich by investing “rationally” - namely this message I have obtained during the reading. But let's start from the beginning:
As investors, we need to understand how our companies truly make their money. A neat trick developed for just that purpose -- the DuPont Formula -- can help us do so.
Well, why not? Everybody would like to make money, especially if the process is based on the firm “scientific” ground. Let's continue:
The DuPont Formula can give you a better grasp on exactly where your company is producing its profit, and where it might have a competitive advantage. Named after the company where it was pioneered, the formula breaks down return on equity into three components:
Return on equity = net margin x asset turnover x leverage ratio
What makes each of these components important?
•High net margins show that a company can get customers to pay more for its products. Luxury-goods companies provide a great example here.
•High asset turnover indicates that a company needs to invest less of its capital, since it uses its assets more efficiently to generate sales. Service industries, for instance, often lack big capital investments.
•Finally, the leverage ratio shows how much the company is relying on liabilities to create its profits.
Generally, the higher these numbers, the better. That said, too much debt can sink a company, so beware of companies with very high leverage ratios.
Well, it looks like we know much better the situation. Let's continue:
So what does DuPont say about these companies?
Company
|
Return on Equity
|
Net Margin
|
Asset Turnover
|
Leverage Ratio
|
Johnson & Johnson
|
17%
|
14.9%
|
0.60
|
1.91
|
20%
|
12.2%
|
0.64
|
2.56
| |
33.5%
|
17.9%
|
0.75
|
2.49
|
So, Eli Lilly wins!!! So what? Should I invest more in Eli Lilly? What I supposed to do with this information? How in the world I have to use it??? What is the author's message?
Using the DuPont Formula can often give you some insight into how a company is competing against peers and what type of strategy it's using to juice return on equity. To find more successful investments, dig deeper than the earnings headlines.
What??? Where, in which place “more successful investments” are described? In order to have any investment to be successful you have to understand at least a couple of issues:
- How much shares to buy
- When to buy
- When to sell
The information provided by the author is absolutely worthless. If you disagree – buy Eli Lilly and pretend that you are a smart investor. But if the investment will not be successful – just sue the author for your losses – (s)he has to take the responsibility for the bunch of BS which overloads the net.
No comments:
Post a Comment