Damodaran on Valuation Regulatory System †MyAssignmenthelp.com

Question: Discuss about the Damodaran on Valuation Regulatory System. Answer: Introduction: The DuPont analysis is focused on analyzing the return on equity that is generated by the company for its shareholders. For this the product of three ratios that is Total asset turnover ratio, profit margin and financial leverage is calculated. Significant indication can be found from the DuPont analysis done in the table. In the year 2001 all, the three ratios increased thereby creating maximum ROE (Gitman et al. 2015). However in the year 2002 and 2003 the profit margin increased to 30% and remained there while the other two ratios i.e. Total asset turnover ratio and financial leverage started decreasing thereby resulting in a decrease in the ROE of the company from 25% to 14%. After 2003 the profit margin kept on decreasing over the years along with no significant increase in the other two ratios thereby the ROE of the company decreased from 14% in the year 2003 to 8% in the year 2007. The company should focus on increasing its profit margin in order to create value for the shareh olders in terms of increased ROE management. From common size income statement, the following trends can be found very evidently: The company was able to generate good EBITDA between 2000 and 2003 with 54% being the highest in the year 2001. Thereafter the companys EBITDA has shown a downward trend that has resulted the EBITDA to drop to a minimum level of 19% in the year 2007. This is an adverse indication that the companys earnings are reducing significantly over the years. The EBIT of the company has followed more or less the same trend as that of the EBITDA due to the fact that the depreciation of the company has not experienced very significant change over the years the highest being 4 and the lowest being 1. Thus the EBIT of the company has also decreased over the years to the minimum level of 17%. In terms of Net Profit, the company has recorded the minimum amount of 9% in the year 2007. Common Size Balance Sheet The calculation indicates that the available cash of the company has decreased substantially over the years. It has dropped from 11% in the year 2000 to 6% in the year 2007. Another most important and significant occurrence is that the company has completely lost its reserves and surplus that means it has become negative over the years (Damodaran 2016). The companys share capital has also decreased over the years. After recording highest percentage of 70% in the year 2006 the share capital of the company fell to 43% in the year 2007. The operating income of the company has been able to increase 16972% with respect to the base year of 2000. The corresponding operating expenses grew to over 24202% from the base year. The EBITDA of the company has recorded consistent growth and finally increased to 7699% which shows that the company has been able to increase its operational profitability to a great extent (Meng 2015). The net profits of the company have followed the same trend as that of the EBITDA and recorded a change of 9956% with respect to the base year of 2000. Balance sheet Analysis The cash of the company though started with a slow growth rate but later on due to the increased sale and profitability there has been infusion of cash in the business thus increasing the percentage change in the cash to 8368%. The share capital of the company has grown by 13783% with respect to the base year. This shows that there has been an infusion of shareholders capital in the business which shows confidence of the shareholders. The company has also been able to increase its retained earnings over the period and the [percentage change in the retained earnings is equal to 10722%. This is sync with the fact that the company has been reporting high operational profitability management. As we know that a score which is less than that of -2.22 is favourable for the company and a score greater than that indicates that the company has engaged itself in some manipulations of the earnings. It is clear from the table that from the year 2003 there have been manipulations in the records of the company (Aithal et al., 2016). The company has done the most significant manipulation in the year 2006 in which there has been an abnormal increase in the days sales in receivables index that has resulted the score to be around 26.49. This indicates the company has engaged in manipulation of accounts. Reference Aithal, P.S., VT, S. and Kumar, P.M., 2016. Analysis of ABC Model of Annual Research Productivity using ABCD Framework. Damodaran, A., 2016.Damodaran on valuation: security analysis for investment and corporate finance(Vol. 324). John Wiley Sons. Gitman, L.J., Juchau, R. and Flanagan, J., 2015.Principles of managerial finance. Pearson Higher Education AU. Meng, Q., 2015. A Study of Islamic Financial Regulatory System from the One Belt and One Road Perspective.Journal of Shanghai University of Finance and Economics,5, p.010.