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DuPont Analysis Ahsan Aslam

This document provides an overview of DuPont analysis, which breaks down return on equity (ROE) into its constituent financial metrics to determine what is driving changes in ROE. It defines the key components of DuPont analysis as net profit margin, asset turnover, and equity multiplier. The document also presents the DuPont analysis formula and explains how each component is calculated. Finally, it discusses how DuPont analysis is useful for investors and stakeholders in evaluating a company's profitability, asset efficiency, and financial leverage.

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57 views3 pages

DuPont Analysis Ahsan Aslam

This document provides an overview of DuPont analysis, which breaks down return on equity (ROE) into its constituent financial metrics to determine what is driving changes in ROE. It defines the key components of DuPont analysis as net profit margin, asset turnover, and equity multiplier. The document also presents the DuPont analysis formula and explains how each component is calculated. Finally, it discusses how DuPont analysis is useful for investors and stakeholders in evaluating a company's profitability, asset efficiency, and financial leverage.

Uploaded by

Saifi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Assignment # 2

DuPont Analysis

Ahsan Aslam

Reg # l1f19bsaf0096

Submitted to :

Sir Abid Noor.

DuPont analysis

The DuPont analysis is a framework for analyzing fundamental performance popularized by the DuPont
Corporation. DuPont analysis is an extended analysis of a company’s return on equity. It concludes that
a company can earn a high return on equity if it earns a high profit margin, uses its assets effectively to
generate more sales and has a high financial leverage.

A DuPont analysis is used to evaluate the component parts of a company's return on equity (ROE). This
allows an investor to determine what financial activities are contributing the most to the changes in
ROE. An investor can use analysis like this to compare the operational efficiency of two similar firms.
Managers can use DuPont analysis to identify strengths or weaknesses that should be addressed.

DuPont Analysis Components

DuPont analysis breaks ROE into its constituent components to determine which of these factors are
most responsible for changes in ROE. There are three major financial metrics that drive return on equity
(ROE) i.e. net profit margin, asset turnover and equity multiplier. Profit margin measures operating
efficiency. Asset turnover measures asset use efficiency. Equity multiplier measures the amount of
financial leverage used by the company.

Formula and Calculation of DuPont Analysis

The DuPont analysis is an expanded return on equity formula, calculated by multiplying the net profit
margin by the asset turnover by the equity multiplier.

DuPont Analysis:

ROE = Net Profit Margin × Asset Turnover × Equity Multiplier

Where,

Net Profit Margin = Net profit /Net sales

Asset turnover = Net sales / Total assets


Equity multiplier = Total assets / Shareholder’s equity

Net Profit Net Sales Total Assets


ROE = × ×
Net Sales Total Assets Shareholde r ' s Equity

So, net sales and asset turnover cancel with each other and

Net Profit
ROE =
Shareholde r ' s Equity
When DuPont analysis is needed to stakeholder point of view ?

This analysis is very important for an investor as it answers the question what is actually causing the ROE
to be what it is. If there is an increase in the Net Profit Margin without a change in the Financial
Leverage, it shows that the company is able to increase its profitability.

But if the company is able to increase its ROE only due to increase in Financial Leverage, it’s risky since
the company is able to increase its assets by taking debt.

Thus we need to check whether the increase in company’s ROE is due to increase in Net Profit Margin or
Asset Turnover Ratio which is a good sign or only due to Leverage which is an alarming signal for the
company so as far as to know this we need DuPont analysis. For high end fashion and other luxury
brands, increasing sales without sacrificing margin may be critical. Finally, some industries, such as those
in the financial sector chiefly rely on high leverage to generate an acceptable return on equity. While a
high level of leverage could be seen as too risky from some perspectives, DuPont analysis enables third
parties to compare that leverage with other financial elements that can determine a company’s return
on equity.

Drawbacks:

Although the DuPont has many advantages as stated above, but everything has its own disadvantages
also.
This analysis uses accounting data from the financial statement in its analysis which can be manipulated
by the management to hide discrepancies.
It is only useful for comparison between the companies under the same industry.
Although DuPont has many advantages as stated above, but everything has its own disadvantages also.
This analysis uses accounting data from the financial statement in its analysis which can be manipulated
by the management to hide discrepancies.
It is only useful for comparison between the companies under the same industry.

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