Scribd
Upload
83 views4 pages

"Financial Analysis": Asma Ali L1f17bsaf0064 Section: B Assignment 2 Du-Pont Analysis 27-4-2020

The document discusses the DuPont analysis, which is a method used to analyze a company's return on equity by breaking it down into profit margin, asset turnover, and financial leverage. The DuPont analysis allows analysts to identify strengths and weaknesses in a company's operations, margins, and debt structure that impact its return on equity. It can be used by investors, managers, and other stakeholders to evaluate different companies or track changes in a company's performance over time.

Uploaded by

Asma Ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
83 views4 pages

"Financial Analysis": Asma Ali L1f17bsaf0064 Section: B Assignment 2 Du-Pont Analysis 27-4-2020

The document discusses the DuPont analysis, which is a method used to analyze a company's return on equity by breaking it down into profit margin, asset turnover, and financial leverage. The DuPont analysis allows analysts to identify strengths and weaknesses in a company's operations, margins, and debt structure that impact its return on equity. It can be used by investors, managers, and other stakeholders to evaluate different companies or track changes in a company's performance over time.

Uploaded by

Asma Ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

Asma Ali

L1f17bsaf0064
Section: B
Assignment 2
Du-Pont Analysis
27-4-2020
“Financial Analysis”
“Dupont analysis”
 The Dupont analysis also called the Dupont model is a financial ratio based on the return on
equity ratio that is used to analyze a company's ability to increase its return on equity.
 A combination of ratios, often referred to as the pyramid of ratios, including leverage and
liquidity analysis.
 The Dupont Corporation developed this analysis in the 1920s. The name has fixed with it
ever since.

Formula:

This formula is known by many other names, including DuPont analysis, DuPont identity, the
DuPont model, the DuPont method, or the strategic profit model.

Components:
The Dupont analysis looks at three main components of the ROE ratio:
 Profit Margin
 Total Asset Turnover
 Financial Leverage
Based on these three performances measures the model concludes that a company can raise its
ROE by maintaining a high profit margin, increasing asset turnover, or leveraging assets more
effectively.
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. Profit margin is calculated by finding the net profit as a
percentage of the total revenue.
Profit Margin= Net Income/Revenue
I. 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. Companies with low profit margins tend
to have high asset turnover, while those with high profit margins tend to have low asset turnover.
Asset Turnover Ratio= Revenue/Average Assets
II. 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.
Financial Leverage= Average Assets/Average Equity

Need of DuPont Analysis:


 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.
 Using these three factors, a DuPont analysis allows analysts to dissect a company, efficiently
determine where the company is weak and strong and quickly know what areas of the
business to look at (i.e., inventory management, debt structure, margins) for more answers.
 The method goes beyond profit margin to understand how efficiently a company's assets
generate sales or cash and how well a company uses debt to produce incremental returns.

Utility of DuPont Analysis from Various Stakeholders Viewpoint:

 The DuPont equation is less useful for some industries, that do not use certain concepts or for
which the concepts are less meaningful. On the other hand, some industries may rely on a
single factor of the DuPont equation more than others.
 Thus, the equation allows analysts to determine which of the factors is dominant in relation
to a company’s return on equity.
 For example, certain types of high turnover industries, such as retail stores, may have very
low profit margins on sales and relatively low financial leverage. In industries such as these,
the measure of asset turnover is much more important.
 High margin industries, on the other hand, such as fashion, may derive a substantial portion
of their competitive advantage from selling at a higher margin. 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.
 Business-economic analysts or stakeholders can use the DuPont method to analyze an
organization and establish what the company’s strengths and weaknesses are, and how they
can improve, in an efficient way. Generally speaking, analysts feel that companies with an
ROE of less than 12-14% are too high risk to invest in.
 Investments in organizations with an ROE of 20% or more, are considered justified and solid
investments.
 The profitability (ROE) of Apple Inc., for example, increased from 17.88% in 2005 to
36.07% in 2017. Investors are always told to be careful with organizations that have a
negative ROE, as they are often confronted with problems related to excessive debts.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy