DuPont Analysis

DuPont Analysis breaks down the Return On Equity into three distinct elements, allowing analysts to compare companies in similar industries. The three elements are:  Profitability,  Operating Efficiency,  and Financial leverage.

DuPont Analysis

The term DuPont Analysis comes from the DuPont Corporation, the company that started using this formula back in the 1920s. DuPont Analysis breaks down the Return On Equity into three distinct elements, allowing analysts to compare companies in similar industries.

The three elements are:  (1) Profitability;  (2) Operating Efficiency;  and (3) Financial leverage.  The DuPont Analysis is known by several other names including DuPont Equation and DuPont Formula.


Formula Used in DUPONT Analysis

ROE = (Profit Margin) * (Asset Turnover) * (Equity Multiplier)

     = (Net Profit/Revenue) * (Revenue/Assets) *

              (Assets/Equity)

     = (Operating efficiency) * (Asset use efficiency) / 

             (Financial leverage)

Dupont Model

Chart showing the interpretation for Dupont Analysis of Return On Equity

DuPont Analysis Interpretation

The DuPont formula separates the Return on Equity calculation into three factors:

  1. Operating efficiency, which is measured by net profit margin;
  2. Asset use efficiency, which is measured by total asset turnover;  and
  3. Financial leverage, which is measured by the equity multiplier;

If the ROE is unsatisfactory, then the DuPont analysis helps locate the part of the business that is under-performing.

Interpretation of each factor should be done in context of other companies within the same or similar industries.  However, it should be noted that the DuPont Analysis is not useful for some industries, such as investment banking, that do not use certain concepts or for which the concepts are less meaningful.

Examples Applicable to DuPont Analysis:

  • High turnover  - retail operations such as grocery stores. 
  • High margin - fashion industry, brand-name products.
  • High leverage - financial sector.

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