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DuPontanalysisWikipedia,thefreeencyclopedia

DuPontanalysis
FromWikipedia,thefreeencyclopedia

DuPontAnalysis(alsoknownasthe
dupontidentity,DuPontequation,
DuPontModelortheDuPontmethod)is
anexpressionwhichbreaksROE(returnon
equity)intothreeparts.
ThenamecomesfromtheDuPont
Corporationthatstartedusingthisformulain
the1920s.

Contents
1Basicformula
2ROEanalysis
2.1Examples
2.1.1Highmargin
industries
2.1.2Highturnover
industries
2.1.3Highleverage
industries
3ROAandROEratio
4References
5Externallinks

GraphicalrepresentationofDuPontanalysis.

Basicformula
ROE=(Profitmargin)*(Assetturnover)*(Equitymultiplier)=(Netprofit/Sales)*(Sales/Assets)*
(Assets/Equity)=(NetProfit/Equity)
Profitability(measuredbyprofitmargin)
Operatingefficiency(measuredbyassetturnover)
Financialleverage(measuredbyequitymultiplier)

ROEanalysis
TheDuPontidentitybreaksdownReturnonEquity(thatis,thereturnsthatinvestorsreceivefromthefirm)
intothreedistinctelements.Thisanalysisenablestheanalysttounderstandthesourceofsuperior(orinferior)
returnbycomparisonwithcompaniesinsimilarindustries(orbetweenindustries).
TheDuPontidentityislessusefulforindustriessuchasinvestmentbanking,inwhichtheunderlyingelements
arenotmeaningful.VariationsoftheDuPontidentityhavebeendevelopedforindustrieswheretheelements
areweaklymeaningful.
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DuPontanalysisreliesupontheaccountingidentity,thatis,astatement(formula)thatisbydefinitiontrue.

Examples
Highmarginindustries
Otherindustries,suchasfashion,mayderiveasubstantialportionoftheircompetitiveadvantagefromsellingat
ahighermargin,ratherthanhighersales.Forhighendfashionbrands,increasingsaleswithoutsacrificing
marginmaybecritical.TheDuPontidentityallowsanalyststodeterminewhichoftheelementsisdominantin
anychangeofROE.
Highturnoverindustries
Certaintypesofretailoperations,particularlystores,mayhaveverylowprofitmarginsonsales,andrelatively
moderateleverage.Incontrast,though,groceriesmayhaveveryhighturnover,sellingasignificantmultipleof
theirassetsperyear.TheROEofsuchfirmsmaybeparticularlydependentonperformanceofthismetric,and
henceassetturnovermaybestudiedextremelycarefullyforsignsofunder,or,overperformance.Forexample,
samestoresalesofmanyretailersisconsideredimportantasanindicationthatthefirmisderivinggreater
profitsfromexistingstores(ratherthanshowingimprovedperformancebycontinuallyopeningstores).
Highleverageindustries
Somesectors,suchasthefinancialsector,relyonhighleveragetogenerateacceptableROE.Otherindustries
wouldseehighlevelsofleverageasunacceptablyrisky.DuPontanalysisenablesthirdpartiesthatrely
primarilyonthefinancialstatementstocompareleverageamongsimilarcompanies.

ROAandROEratio
Thereturnonassets(ROA)ratiodevelopedbyDuPontforitsownuseisnowusedbymanyfirmstoevaluate
howeffectivelyassetsareused.Itmeasuresthecombinedeffectsofprofitmarginsandassetturnover.[1]

Thereturnonequity(ROE)ratioisameasureoftherateofreturntostockholders.[2]DecomposingtheROE
intovariousfactorsinfluencingcompanyperformanceisoftencalledtheDuPontsystem.[3]

Where
Netincome=netincomeaftertaxes
Equity=shareholders'equity
EBIT=Earningsbeforeinterestandtaxes
Thisdecompositionpresentsvariousratiosusedinfundamentalanalysis.
Thecompany'staxburdenis(NetincomePretaxprofit).Thisistheproportionofthecompany'sprofits
retainedafterpayingincometaxes.[NI/EBT]
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Thecompany'sinterestburdenis(PretaxincomeEBIT).Thiswillbe1.00forafirmwithnodebtor
financialleverage.[EBT/EBIT]
Thecompany'soperatingincomemarginorreturnonsales(ROS)is(EBITSales).Thisisthe
operatingincomeperdollarofsales.[EBIT/Sales]
Thecompany'sassetturnover(ATO)is(SalesAssets).
Thecompany'sleverageratiois(AssetsEquity),whichisequaltothefirm's[[debttoequityratio]+1].
Thisisameasureoffinancialleverage.
Thecompany'sreturnonassets(ROA)is(ReturnonsalesxAssetturnover).
Thecompany'scompoundleveragefactoris(InterestburdenxLeverage).
ROEcanalsobestatedas:[4]
ROE=TaxburdenxInterestburdenxMarginxTurnoverxLeverage
ROE=TaxburdenxROAxCompoundleveragefactor
Profitmarginis(NetincomeSales),sotheROEequationcanberestated:

References
1. Groppelli,AngelicoA.EhsanNikbakht(2000).Finance,4thed.Barron'sEducationalSeries,Inc.pp.444445.
ISBN0764112759.
2. Groppelli,AngelicoA.EhsanNikbakht(2000).Finance,4thed.Barron'sEducationalSeries,Inc.p.444.ISBN0
764112759.
3. Bodie,ZaneAlexKaneAlanJ.Marcus(2004).EssentialsofInvestments,5thed.McGrawHillIrwin.pp.458459.
ISBN0072510773.
4. Bodie,ZaneAlexKaneAlanJ.Marcus(2004).EssentialsofInvestments,5thed.McGrawHillIrwin.p.460.
ISBN0072510773.

Externallinks
FreeVideoTutorialonDuPontAnalysis(http://www.youtube.com/watch?v=B9swKCSx_lQ)
DecodingDuPontAnalysis(http://www.investopedia.com/articles/fundamentalanalysis/08/dupont
analysis.asp)
DuPontanalysis(http://es.slideshare.net/HECTORADRI/anlisisdupontexcelwithintuitive)
Retrievedfrom"http://en.wikipedia.org/w/index.php?title=DuPont_analysis&oldid=662923197"
Categories: Financialratios DuPont
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