DUPONT ANALYSIS
DuPont Analysis
After seeing and analyzing the ratios, you might
think that they are too many. A man by the name of
Donald Brown who happened to be Du Pont's chief
financial officer thought of the same thing. So he
came up with the Du Pont Equation or the Du Pont
System Analysis. The Du Pont company emphasized
that satisfactory return on assets may be achieved
by having high profit margins/net profit ratio or by
having a faster asset turnover, or a good combination
of both.
DuPont Analysis
DuPont Analysis is a powerful tool for
analyzing financial performance. It breaks down
Return on Equity (ROE) into its components,
providing insights into profitability,
efficiency, and leverage.
Understanding Return on Equity
Return on Equity (ROE) measures a
company's ability to generate profit
from its shareholders' equity. A
higher ROE indicates effective
management and financial health.
Components of the DuPont Analysis
The DuPont Analysis consists of three primary
components:
1. Net Profit Margin
2. Asset Turnover
3. Financial Leverage
NET PROFIT MARGIN
Profit margin is a measure of profitability.
It is an indicator of a company's pricing
strategies and how well the company
controls costs.
As one feature of the DuPont equation, if
the profit margin of a company increases,
every sale will bring more money to a
company's bottom line, resulting in a
higher overall return on equity.
ASSET TURNOVER
Asset turnover is a financial ratio that
measures how efficiently a company uses
its assets to generate sales revenue or
sales income for the company.
Similar to profit margin, if asset
turnover increases, a company will
generate more sales per asset owned, once
again resulting in a higher overall return
on equity.
FINANCIAL LEVERAGE
Financial leverage refers to the amount of
debt that a company utilizes to finance its
operations, as compared with the amount
of equity that the company utilizes
As was the case with asset turnover and
profit margin, Increased financial leverage
will also lead to an increase in return on
equity.
DUPONT ANALYSIS
ROE
ROA × Financial
Net income÷
Ave. Total asset Leverage
PROFIT MARGIN ASSET TURNOVER Ave total asset ÷
Net income ÷
Net sales
× Net sales ÷
Ave total asset
Ave common equity
Figure 1
Composition of Return on Equity Using the DuPont
Formula:
The net profit margin, asset turnover, and
equity multiplier are the components needed
to compute the return on equity using the
DuPont model.
The equity multiplier is the measurement for
financial leverage that allows an investors to
examine the contribution of debt on the
return on equity.
To compute for ROE using the DuPont model:
DuPont Analysis
- is an integrative approach in explaining and looking
at the differences in Return on Total Asset.
It is another way of computing the return on equity
by getting the product of the profit margin and the
total asset turnover.
EXAMPLE :
EXAMPLE :
EXAMPLE :
Ave
Ave Common
A favorable net profit ratio would indicate that the
company has good cost control measures, and a high
asset turnover rate would mean efficient use of
assets.
In conclusion, the DuPont Framework provides
valuable insights into financial performance
through its detailed analysis of ROE. Understanding
its components helps stakeholders make informed
decisions and improve financial outcomes. Embracing
this framework can leadtemplate
CREDITS: This presentation to better strategic
was created by Slidesgo,
planning.
including icons by Flaticon, and infographics & images by Freepik
THANK YOU!!
