Every day this week I am uploading a poster taken from the contents of my book on energy and resource efficiency – to help fellow practitioners communicate the benefits and processes that will unlock value in their organizations and sustain change.
Today is day 2 and I am illustrating how energy and resource efficiency can improve ‘return on equity’ for shareholders:
DuPont Formula: Return on equity = net profit margin * asset turnover * financial leverage
Net profit margin: It is obvious that we can make money if we increase our profit margin on every item we sell, for example by using less energy….
Asset turnover: We can also make money by producing more items from our existing plant, i.e. if we are more productive, for example by increasing capacity through greater efficiency.
Financial leverage: Shareholders can make a greater return if someone else (e.g. a bank) pays for the investment in equipment. However too high a leverage will lead to a worry about the company’s ability to service the debt. An example here is that a highly efficient building will get better tenants which will lead to better ‘covenant terms’ so the landlord can get a higher mortgage…