|
How operating
cycle affects the roA ?
Commercial profitability
: ROS (Return on sales)
How much
profit a company is generating per 100 €
of sales ?
Net
profit after Tax (PAT) can be affected
:
-
-
interest (change in financial
policy).
So,
it is better to take EBIT (Taxes
and Interests
are outside the control
of operating managers)
To
show how Operating Cycle affects the
Economic Profitability, ROA
must be decomposed into 2 elements :
Pre-tax
ROA = |
ROS |
x |
Asset
turnover |
|
Pre-tax
ROA = |
EBIT |
x |
Sales
|
|
|
Sales |
Total
Assets |
|
Starworld
Group |
2021 |
2022 |
2023 |
EBIT |
478 |
676 |
1042 |
Sales |
2784 |
3341 |
4343 |
Assets |
2250 |
2605 |
2700 |
Return on Sales |
17.17% |
20.23% |
23.99% |
Asset Turnover |
1.237 |
1.283 |
1.609 |
Pre-tax
ROA |
21,24
% |
25,95
% |
38,59
% |
So,
Operating Managers can impact the company
ROA
-
either
by improving the Profit margin [ EBIT
/ Sales]
-
or
by improving the Asset turnover
[ Sales / Asset ]
-
through
a better capacity
utilization
or
a more efficient WCR
management
The
Dupont Chart is a very useful managerial
tool
quick and simple
way to show to the various managers,
in charge of different functions (production,
purchasing, administrative, marketing
and sales, etc...) their impact on
the overall ROA.

Sources :
Interpreting and using Financial Statements,
1999, Marc Bertonèche, Ph. D.
in Finance from the Northwestern University,
Professor at the Bordeaux University and
at Sciences-PO Paris, Visiting Professor
at Harvard Business School and Oxford University
Corporate
Finance Course, Bernard Jaquier, Professor
in Economics & Finance, Lausanne, Switzerland, 2024
|
|
|
|
|
|