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    Chapter 3.3 - Dupont Analysis

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    Mehta Vani Joghee

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    Chapter 3.3 - Dupont Analysis

    Uploaded by

    Mehta Vani Joghee
    2 views5 pages

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    Copyright:

    © All Rights Reserved
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    Download as ppt, pdf, or txt
    2 views5 pages

    Chapter 3.3 - Dupont Analysis

    Uploaded by

    Mehta Vani Joghee

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 5

    Chapter 3.

    Dupont Analysis
    Introduction
    • Du Pont analysis also Du Pont model is a financial
    ratio based on return on equity ratio that is used to
    analyze a company’s ability to increase its return on
    equity.
    • It breaks down the return on equity ratio to explain
    how companies can increase their return for
    investors.
    • The Du Pont analysis looks at three main components
    of the ROE ratio.
    Profit Margin
    Total Asset Turnover
    Financial Leverage
    2
    Formula
    • A company can increase its return on equity by
    maintaining a high profit margin, increasing asset
    turnover, or leveraging assets more effectively.
    • The Du Pont Model equates ROE to profit margin,
    asset turnover, and financial leverage.
    Du Pont Analysis
    ROE = Profit Margin X Total Asset Turnover X Financial Leverage
    Profit Margin = Net Income / Net Sales
    Total Asset Turnover = Net Sales / Average Total Assets
    Financial leverage = Total Assets / Total Equity

    3
    Analysis
    • Du Pont Analysis was developed to analyze the ROE
    and the effects that different business performance
    measures have on this ratio. The objective is to
    analyze the variable causing the current ROE.
    • For instance, if investors are unsatisfied with a low
    ROE, the management can use this formula to
    pinpoint the problem area whether it is a lower profit
    margin, asset turnover, or poor financial leveraging.
    • Once the problem is determined, management can
    attempt to correct deviations.

    4
    Conclusion
    • This model helps investors to compare similar
    companies like these with similar ratios. Investors
    can then evaluate perceived risks with each
    company’s business model.

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