DuPont Analysis

What is DuPont Analysis?

DuPont analysis is a method used to decompose return on equity into its constituent parts to evaluate the company's operational efficiency, asset management effectiveness, and financial leverage. By breaking down ROE into its components, DuPont analysis allows investors, analysts, and managers to identify strengths, weaknesses, and areas for improvement within a company's financial structure.

DuPont Analysis Example

Suppose a company has an ROE of 15%. Through DuPont analysis, this ROE can be broken down into three components: net profit margin, asset turnover, and financial leverage. For instance, if the net profit margin is 10%, asset turnover is 1.5 times, and financial leverage multiplier is 1.5, the DuPont analysis would reveal that:

Return on Equity = Net Profit Margin * Asset Turnover * Financial Leverage
ROE = 10% * 1.5 * 1.5 = 15%

This breakdown helps stakeholders understand that the company's ROE is driven by a combination of profitability, asset utilization, and leverage.

DuPont Analysis Formula

The DuPont analysis formula is expressed as:
Return on Equity (ROE)= Net Profit Margin × Asset Turnover × Financial Leverage

Where:

Net Profit Margin= Net Income / Revenue
Asset Turnover= Revenue / Average Total Assets
Financial Leverage= Average Total Assets / Average Shareholders' Equity