DU PONT ANALYSIS
The Du Pont Company of the US developed a system of financialanalysis which has got good recognition and acceptance.Analyzing return ratios in terms of profit margin and turnoverratios, it is referred as the Du Pont System. It integrates elementsof the income statement with those of balance sheet.DuPont analysis tells us that ROE is affected by three things:
Operating efficiency, which is measured by profit margin
Asset use efficiency, which is measured by total assetturnover
Financial leverage, which is measured by the equitymultiplier
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover(Sales/Assets) * Equity Multiplier (Assets/Equity
If ROE is unsatisfactory, the DuPont analysis helps locate the partof the business that is underperforming.
Steps in DuPont Analysis:
1. Collect the data2. Calculate the required ratios (using spreadsheet)3. Draw conclusions4. If conclusions are unrealistic, calculate again and check for theauthenticity of the dataIn the Dupont Analysis we try to find out what are thefactors/drivers that are causing the profits to move up. Byidentifying these factors/drivers we can concentrate on them andimprove our efficiency.