Are the banks excesively profitable data

This is an explanation of the numbers used in Are the banks excessively profitable?.

To leverage up JB Hi Fi’s balance sheet I simply used the Dupont model, which breaks a company’s return on equity into five parts:

-Sales/assets

-EBIT/Sales (operating profitability)

-Pre-tax profit/EBIT

-Profit/pre-tax profit

-Assets/equity

Sales/assets is about how much revenue the company can generate from its assets. For Tanz THIS IS THE LOANS IT has on its books, and for JB Hi Fi it’s the shops it operates. The next three are about how much of this revenue falls to the bottom line as profits, and isn’t eaten up as costs. Finally the last ratio measures leverage. Equity is the amount of money put into the business by owners, and if the amount of assets the company owns is much larger than this then the money to buy them must have come from debt issues (or to be more precise, liability issues). To apply leverage to JB Hi Fi’s business it’s simply a matter of working out how much debt has to be raised to equate JBH’s leverage ratio (assets/equity) with ANZ’s, and then using it to buy assets, which you assume it gets the same return on as the currently owned assets, and then keeping all the other profitability ratios constant on the way down. But it’s even simpler than that, because the five ratios of the Dupont model are such that when multiplied together they conveniently show the return on equity. So keeping all of them constant, and just increasing the leverage ratio to equal ANZ’s, the numbers are:

Leverage ratio:                  15.57

Return on assets:             3.82

EBIT/sales:                          6.46%

Pre-tax profit/EBIT:         96.06%

Profit/pre-tax profit:      69.96%

Which when multiplied together show a return on equity of a whopping 258% and change. But if you don’t believe me (or DuPont Corporation) here are the numbers:

	Actual	Leveraged
Revenue:	2,731,320.00	17,444,483.51
EBIT:	176,558.00	1,126,913.63
Pre-tax profit:	169,601.00	1,082,513.24
Profit:	118,652.00	757,326.26
Equity:	293,296.00	293,296.00
Assets:	714322.00	4,566,618.72
Profit/equity:	41%	258%

The share buyback calculations are just working out what JB Hi Fi needs to have in debt to ensure a net debt to equity ratio equal to ANZ's:
=equity*ANZ's net debt to equity+cash and cash equivilents
=293 296*10.6+51 735
minus already existing debt:
=3 160 672.60-69 624
to show the amount of money they raise. divide* by the share price on 8/7/2011
=178776668.59/17.29
which shows that they could buy back at the market price 178 776 668.59 shares, 182% of their 108 118 000 shares outstanding according to their 2010 anual report. take that ANZ.

*the amount shown in the next equation is multiplied by 1000 because the values shown are directly from the balance sheet and are divided by 1000.