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Determining a company's financial health is a very important step in making a decision on whether or not to invest or to stay invested. There are many different ways to compute a company's financial health. In the article below, I will be considering E.I. du Pont de Nemours and Company's (DuPont) (NYSE:DD) profitability, debt and capital, and operating efficiency. Based on this, we get to see sales, returns, margins, liabilities, assets, returns and turnovers.

All numbers sourced from Company Webpage.

Profitability

Profitability is a class of financial metrics used to assess a business's ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net Income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money, and gauge the quality of the reported profits.

  • Net Income 2010 = $3.031 billion.
  • Net Income 2011 = $3.474 billion.
  • Net Income 2012 = $2.788 billion.

Over the past three years DuPont's net profits have decreased from $3.031 billion in 2010 to $2.788 billion in 2012. This signifies a decrease of 8.02% in earnings over the past 3 years.

  • Operating Cash Flow 2010 = $3.711 billion.
  • Operating Cash Flow 2011 = $3.781 billion.
  • Operating Cash Flow 2012 = $3.115 billion.

Operating cash flow is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three years, the company's operating cash flow has also decreased. DuPont's operating cash has decreased by 16.06%.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net Income 2010 = $3.031 billion.
    • Net Income 2011 = $3.474 billion.
    • Net Income 2012 = $2.788 billion.
  • Total asset growth

    • Total Assets 2010 = $40.410 billion.
    • Total Assets 2011 = $48.492 billion.
    • Total Assets 2012 = $49.736 billion.
  • ROA - Return on assets

    • Return On Assets 2010 = 7.50%.
    • Return On Assets 2011 = 7.16%.
    • Return On Assets 2012 = 5.61%.

Over the past three years, DuPont's ROA has decreased from 7.50% in 2010 to 5.61% in 2012. This indicates that the company is making less money on its assets than it did in 2010.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.

2010

  • Operating Cash Flow 2010 = $3.711 billion.
  • Net Income 2010 = $3.031 billion.

2011

  • Operating Cash Flow 2011 = $3.781 billion.
  • Net Income 2011 = $3.474 billion.

2012

  • Operating Cash Flow 2012 TTM = $3.115 billion.
  • Net Income 2012 TTM = $2.788 billion.

Over the past three years, the operating cash flow has been higher than the net income. This indicates that the company is not artificially creating profits by accounting anomalies such as inflation of inventory.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total Assets

    • Total Assets 2010 = $40.410 billion.
    • Total Assets 2011 = $48.492 billion.
    • Total Assets 2012 = $49.736 billion.
    • Equals and increase of $9.326 billion
  • Total Liabilities

    • Total Liabilities 2010 = $31.132 billion.
    • Total Liabilities 2011 = $39.899 billion.
    • Total Liabilities 2012 = $39.648 billion.
    • Equals and increase of $8.516 billion

Over the past three years, DuPont has acquired more total assets than total liabilities. This indicates that the company has not been financing its assets through debt. Over the past three years, the company's total assets increased by $9.326 billion, while the total liabilities increased by $8.516 billion.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current Assets/Current liabilities

  • Current Assets

    • Current Assets 2010 = $19.059 billion.
    • Current Assets 2011 = $18.058 billion.
    • Current Assets 2012 = $21.191 billion.
  • Current liabilities

    • Current liabilities 2010 = $9.389 billion.
    • Current liabilities 2011 = $11.185 billion.
    • Current liabilities 2012 = $13.549 billion.
  • Current Ratio 2010 = 2.03.
  • Current Ratio 2011 = 1.61.
  • Current Ratio 2012 = 1.56.

Over the past three years, DuPont's current ratio has decreased from 2.03 in 2010 to 1.56 in 2012. This indicates that the company has less of the ability to pay off its short-term obligations than it did three years ago. As the most recent number is above 1, this signifies strength and indicates that the company would be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2010 Shares Outstanding = 917.31 million.
  • 2011 Shares Outstanding = 926.12 million.
  • 2012 Current Shares Outstanding = 933.02 million.

Over the past three years, the number of company shares have increased. DuPont's common shares have increased from 917.31 million in 2010 to the current number of 933.02 million. This is a increase of 1.71%.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross Margin 2010 = $8.359 billion / $32.733 billion = 25.54%.
  • Gross Margin 2011 = $8.807 billion / $34.423 billion = 25.58%.
  • Gross Margin 2012 = $9.208 billion / $35.310 billion = 26.08%.

Over the past three years, the gross margin has increased. The ratio has increased from 25.54% in 2010 to 26.08%. As the margin has increased, this indicates the company has been more efficient in its distribution.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2010 = $32.733 billion.
    • Revenue 2011 = $34.423 billion.
    • Revenue 2012 = $35.310 billion.
    • Equals an increase of 7.87%.
  • Total Asset growth

    • Total Assets 2010 = $40.410 billion.
    • Total Assets 2011 = $48.492 billion.
    • Total Assets 2012 = $49.736 billion.
    • Equals an increase of 23.08%.

As the revenue growth has not exceeded the asset growth, this implies that the company's revenue did not keep up its asset growth.

Based on the nine different criteria above, Overall DuPont is showing mixed results. The company is showing weakness in its profitability as the net income, operating cash and ROA are all showing a decline. The company is showing stability within based on the TL/A ratio and the strength of the working capital. DuPont's gross margin has increased over the past three years indicating that the company has increased its efficiency. Based on the above criteria, Dupont is showing that it is a solid company but displaying mixed results regarding its profitability over the past three years.

Analysts at Bloomberg Businessweek are estimating DuPont's revenues and profitability to be flat in 2013. They are estimating DuPont's revenue to be at $36.2 billion for FY 2013. They are also estimating DuPont to have an EPS at $3.84 for FY 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: DuPont: Inside The Numbers