Chapter 14 Financial Statement Analysis 641We now have more insight into the difference between Pixar and DreamWorks’ rate
earned on total assets. Pixar’s profit margin is much better than DreamWorks’, 51.8%
compared to 30.9%. However, Pixar is much less efficient in using its assets. Pixar
earns $0.24 in net sales for each dollar of total assets, while DreamWorks earns $1.15
in net sales for each dollar of total assets. This is a significant difference in asset effi-
ciency. Multiplying these two factors together shows that DreamWorks’ rate earned on
total assets of 35.4% was stronger than Pixar’s 12.4%. Apparently, Pixar’s higher profit
margin was not sufficient to compensate for its much lower asset turnover, when com-
pared to DreamWorks.
Each of the two factors that determine the rate earned on total assets can be sub-
jected to a more detailed analysis. The profit margin can be analyzed in more detail,
using common-size information, while the total asset turnover can be segmented into
a more detailed asset efficiency analysis.Margin Analysis
Why is the profit margin of Pixar over 20 percentage points stronger than DreamWorks?
This question can be addressed by analyzing the percentage of major expenses to net
sales and comparing the percentages for the two companies.
Exhibit 7 is a comparative common-size income statement for Pixar and
DreamWorks, wherein the major income statement items are translated into a percent
of net sales (or revenues). Exhibit 7 indicates that Pixar has a much higher rate of gross
profit (or lower cost of goods sold) as a percent of sales than does DreamWorks. Pixar’s
selling expenses are nearly the same as DreamWorks’, but Pixar incurs expenses for
research and development of proprietary animation software that is not incurred by
DreamWorks. Pixar has interest income from its investments as a percent of sales,
while DreamWorks incurs interest expense on debt. DreamWorks should review its
cost of goods sold and determine if there might be better methods of producing films
to better match Pixar’s performance.Asset Efficiency
We determined from the DuPont analysis that Pixar’s total asset turnover was 0.24,
while DreamWorks’ was 1.146. What causes this difference? We can segment the totalExhibit 7
Pixar and DreamWorks
Animation SKG
Pixar and DreamWorks Animation SKG
Condensed Common-Size Income Statements
For the Year Ended January 1, 2005, and December 31, 2004Pixar DreamWorks
Total revenue 100.0% 100.0%
Cost of goods sold 10.9 52.5
Gross profit 89.1% 47.5%
Research and development expenses 6.4 0.0
Selling, general, and administrative expenses 6.4 6.8
Income from operations 76.3% 40.7%
Net interest income or expense 4.5 (1.4)
Income before income taxes 80.8% 39.3%
Income tax expense 29.0 8.4
Net income 51.8% 30.9%