Abdul Sameeh

L1F17BSAF0048
FINANCIAL ANALYSIS
ASSIGNMENT NO.2
SUBMITTED TO SIR Abid Noor
What is Du-Pont analysis?
The Du-Pont Corporation developed this analysis in the 1920s..The Du-Pont analysis also called
the Du-Pont 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. In other words, this model breaks down the
return on equity ratio to explain how companies can increase their return for investors. DuPont
analysis is a useful technique used to decompose the different drivers of return on equity (ROE).
The decomposition of ROE allows investors to focus on the key metrics of financial performance
individually to identify strengths and weaknesses.

Roe Formula:

This formula is identified as the Do-Pont model and Do-Pont method. The Dupont analysis looks
at three main components of the ROE ratio.

Components:
 Profit Margin
 Asset Turnover
 Financial Leverage

These components is based on three performances measures of the model which 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

Total asset turnover:

This ratio depicts the efficiency of the company in using its assets. This is calculated by dividing
revenues by average assets. This ratio differs across industries but is useful in comparing firms in
the same industry. If the company’s asset turnover increases, this positively impacts the ROE of
the company.

Asset Turnover= Revenues/Average Assets

Financial Leverage:
Financial leverage, or the equity multiplier, is an indirect analysis of a company's use of debt to
finance its assets.

Financial Leverage= Average Assets/Average Equity

Why Du-Pont is Useful

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. 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.

Du-Pont Analysis with shareholders 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.