Business Case Studies & Business Publications

The Financial Cockpit: Three Levers and ...

Haskins, Mark E.

Case

The Financial Cockpit: Three Levers and One Flight Plan

Haskins, Mark E.

C-2313 | Published July 29, 2010 | 5 pages Case

Collection: Darden School of Business

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This case focuses on the use and interpretation of the DuPont model financial ratios, in particular the following four: return on sales, asset turnover, financial leverage, and return on equity. Students consider how these ratios are used to assess a company’s financial performance for a single year, over time, and in comparison with other companies within and outside the focal company’s industry. They also learn how these ratios provide insight into a company's business model via the margins it is able to earn, the productivity with which it uses its assets, and the company’s aggressiveness (or lack thereof) in using borrowed money to finance its operations. The case is rooted in the basic premise that “ROE is the ratio most commonly used to analyze profitability of a business” and it is “important to both current and prospective shareholders.” Furthermore, in the context of the DuPont model, the case positions ROE as the product of the other three ratios noted above. Thus, the protagonist in the case, Jill Keyes, has gravitated to the DuPont model. The case ends with a set of questions that Jill Keyes has left for her follow-up—these provide the basic assignment for students.

Students benefit from this case by: obtaining valuable insights from financial statements when various parts of those statements are juxtaposed against each other to create financial ratios; defining, calculating, interpreting, and evaluating the four classic DuPont financial ratios; gaining the ability, in an explanatory mode, to compare and contrast the values for these ratios across companies; identifying the potential weaknesses latent in these four ratios; acknowledging the array of other financial ratios potentially useful in the financial analysis arena; and becoming aware of the annual Fortune 500 listing of companies, which reports key parts of the DuPont model, providing easy access for a reader to derive all four of the key DuPont ratios emphasized in this case.