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December 12, 2002 - ICLUBcentral News

NAIC Software News December 12, 2002


2002 NAIC Club Tax Printer is faster & easier than ever

Holiday time is here again ... and tax season is following close on its heels! All active investment clubs must file federal tax forms, even clubs that lost money or didn’t trade.

The 2002 NAIC Club Tax Printer makes this dreaded task easy and error-free. In just a few minutes, the software helps you produce “ready-to-mail” Federal Tax Forms for your club and each member. You can print a finished Form 1065 (including Schedule D and supporting schedules) for your club, plus a Schedule K-1 for each member. Just review and sign them, then lick the stamps. You’re done!

This year, we’re offering two versions of the NAIC Club Tax Printer:

Desktop Version
Works on Windows-based personal computers with NAIC Club Accounting version 2. (If your club is still using NCA 1.04, please see for information on how to bring your software up-to-date.)

Online Version
Works on all major operating systems, including Macintosh and Windows, as part of NAIC Online Club Accounting (NOCA).

Useful tax-related links and detailed information on the NAIC Club Tax Printer may be found at

The 2002 NAIC Club Tax Printer will be available soon after the IRS finalizes its tax forms (typically in mid-to-late December) but you can pre-order yours today for just $49 at Telephone orders will be accepted by NAIC only after January 1, 2003.

Special Series (4 of 6):
Return on Equity - The Dupont Formula
by Jeff Hakala, CFA, CPA

The past three articles in this series described the three key financial statements that companies present quarterly and annually – the Balance Sheet, the Income Statement and the Statement of Cash Flow. This article will begin exploring financial tools that highlight and teach much about a company. Return on Equity (ROE) is an analysis tool used by investment professionals. NAIC members reading this article are likely already acquainted with ROE. Seger-Elvekrog will not even consider a stock until it has examined a company’s ROE. Once the firm calculates ROE, it dissects it further using the Dupont Formula.

How is Return on Equity (ROE) calculated? What does it communicate? Why is ROE so important?

Return on Equity = Net Income / Average Stockholders’ Equity

(Please note that you average the beginning and ending stockholders’ equity amounts. Stockholders’ equity is a Balance Sheet account and reflects the balance at a point in time, whereas, net income is an Income Statement amount and reflects a company’s profitability over a period of time.)

ROE communicates to financial readers how efficient a company is with its shareholders’ equity. (You will recall from the first article in this series, which covered the Balance Sheet, that stockholders’ equity consists of owners contributed capital and owners retained profits that are not paid out as dividends. Basically the above ratio communicates how effective a company is with its shareholders’ money.) If a company’s ROE is 20%, that means that a company returned $0.20 for every dollar of shareholders' equity invested or retained within the company. Shareholders' equity per share will not equal the amount of money a shareholder paid for a stock. Proceeds from an initial public offering (IPO) are provided to the company in exchange for shares of stock. If one buys a security through a stock exchange, they are buying it as a secondary offering and the proceeds go to the individual or an institution selling the stock, not the company.

To understand why a company’s ROE changes from one year to the next or how a company can increase its ROE, a formula exists: the Dupont Formula. I suggest you commit this to memory:

ROE = Net Profitability * Asset Turnover * Leverage

To understand how this formula is derived, you will need to understand some math. However, if you don’t understand math well, just trust me that the above equation is correct.

Begin with: 

    ROE =   Net Income 
                  Avg. Equity

This next equation, multiplies ROE by Sales/Sales and Avg. Assets/Avg. Assets which doesn’t change the value since each of these multipliers equals:

    ROE    =    Net Income   *  Sales   *   Avg. Assets
                      Avg. Equity      Sales        Avg. Assets

If one rearranges the denominators in the above formula, the result is:

    ROE      =   Net Income    *       Sales         *       Avg. Assets
                            Sales            Avg. Assets            Avg. Equity

Each ratio results in the Dupont Formula:

ROE (Dupont)  =    Net Profit Margin  *  Asset Turnover  *  Leverage

A company can increase its ROE by increasing any one of the above ratios.  For example, if a company increases its net profit margin, ROE will increase.  If a company can get more sales out of its existing assets, its ROE will increase.  If a company increases its leverage or debt load, a company can increase its ROE.

If a company’s ROE increases or is trending up, one will want to find out why.  For example, if a company is increasing just leverage, it may be only a short-term gain and may be fatal long-term.  However, if a company is consistently increasing profit margin, that may be great, but if a company achieved greater profit margins by cost cutting, an increasing or trending up ROE may not continue.  The net of all this is that one needs to understand what is happening to ROE and why.

Essential Takeaways:

  1. Return on Equity communicates how efficient a company is with its shareholders’ equity invested in the company.  The higher the ratio the better a company is with its shareholders money.

ROE = Net Income / Average Stockholders’ Equity

  1. Dupont Formula – Enables an analyst to dissect the components that contribute to or impact a company’s ROE.  The three key parts are a company’s net profit margin, asset turnover and leverage.  

 Dupont = Net Income/Sales * Sales/Avg. Assets * Avg. Assets/Avg. Equity

Jeffrey A. Hakala, CFA, CPA is a professional portfolio manager and security analyst with Seger-Elvekrog Inc. Jeff can be reached via e-mail at His firm’s website is

Seger-Elvekrog publishes a monthly newsletter and distributes it at no cost via email. If anyone is interested in receiving an electronic copy, please email

Find Red Flags First with Stock Analyst Plus

NAIC's most powerful analytical software, Stock Analyst Plus is the only NAIC Software that enables in-depth balance sheet analysis.

Order for $99 at 1-877-275-6242, ext 0, or online at  More information & demo copies available at  

Investment Club Therapist: Tackling Temporary Leave
by Doug Gerlach

Dear Doug:

I am president of an investment club with 14 members. We have a member who would like to be inactive for a few months but stay in the club until she starts making monthly payments again three months to a year from now. We use NAIC Club Accounting software, and if I enter the Inactive key on this member name, the program immediately calculates what the club needs to pay her off. How can I enter her "temporary" inactive status without having to pay her off, leaving her account until she starts paying again? Or do I have to enter the inactive status at all? Can I just enter $0.00 as contributions for the months she does not contribute? And when she starts paying again, do I have to do something different? I appreciate your answer to my question.

- Toya

Dear Toya:

As you've discovered, marking a member "inactive" in NAIC Club Accounting doesn't accomplish what you're trying to do. An inactive member is one who has withdrawn from your club, and your club administrator should only change a member's status when he or she is no longer a member.

In your situation, the proper way to handle your member who's lying low for a while is to do nothing — at least as far as club accounting is concerned. Whether or not the member makes monthly contributions, her existing capital account in the club will remain active. Every month, that member's name will appear on your member status report along with every other partner. When the stray member returns to the fold, check in hand, your treasurer will simply enter her dues in the books just like any other member contribution.

Having said that, I must take this opportunity to talk a bit about partners in absentia, a topic I've tackled before and which you can find in the Investment Club Therapist archives. Investment clubs function because members share the workload and their brainpower. If no one in your club does any work, then you'll find it impossible to build and manage an investment portfolio.

In your case, Toya, it sounds like your member has some specific reasons for wanting to pull back from participating in the club. Perhaps she has lost her job or is going through a divorce or is working through some other temporary issues. She's doing the right thing by asking the club to let her off the hook for a time, so that the club knows not to expect her to be attending meetings, making contributions or providing investment research during this period. And your club is responding sympathetically by letting her take a leave of absence.

The Investment Club Therapist is all for close-knit bonds between club members, maintaining a nurturing, non-threatening atmosphere for club operations, yada, yada, yada, but you've got to be realistic, too.

In effect, your club member is asking the remaining club members to manage her share of the club portfolio. Are all of you up to the responsibility and the additional workload? And most club members who request a temporary leave from the club eventually end up withdrawing completely, so you might just be delaying the inevitable. Are you setting a precedent that will allow other partners to remain "members" but not participate in the club's operations? What does the absentee partner get out of being an inactive member? She's surely not learning anything by not participating. Be sure to review the Investment Club Therapist's other objections to silent partners, as well.

In your case, I'd suggest that you agree to review the member's status after a set period, say, six months. At that time, if the member still has no idea when she might rejoin the club, you — and the member — should think long and hard about whether it's good for her and for the club for her to remain on hiatus, if you should grant an extension of her leave, or if she should withdraw completely.

- Doug

Doug Gerlach, author of several popular investing books and websites, serves in his spare time as Secretary of NAIC's Computer Group Advisory Board. To ask Doug an investing question yourself, just write to!

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