DuPont Analysis

GROUP 7 PRESENTATION

TOPICS TO BE DISCUSSED:

INTRODUCTION
IMPORTANCE
FORMULA & CALCULATION
DUPONT ANALYSIS COMPONENTS
3 STEP AND 5 STEP DUPONT
LIMITATIONS
PROS AND CONS

INTRODUCTION
The DuPont Analysis Formula is another method for
calculating and deconstructing ROE (Return on Equity) to
have a better understanding of the underlying elements
influencing a company's ROE. The DuPont equation divides
return on equity (ROE) into three components. Profit Margin,
Asset Turnover, and Financial Leverage are examples of
these. The decomposition of ROE helps potential investors to
focus on the main financial performance parameters that
highlight the firm's strengths and weaknesses.
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Understanding DuPont Analysis
The DuPont analysis is a technique used to track the
financial success of a corporation. It was invented by F.
Donaldson Brown in 1914. Donaldson Brown, a DuPont
Corporation employee. His approach combines profits,
investment, and working capital into a single statistic
known as return on investment (ROI). It was adopted by
other corporations and became a standard metric for all
DuPont departments. The DuPont analysis is a framework
for measuring a business's core performance, and it is now
used to evaluate the operational efficiency of two identical
organizations within the same industry.
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IMPORTANCE
DuPont analysis is a useful approach for separating a company's multiple ROE sources. It enables analysts to

identify the financial activities that contribute the most to shifts in ROE. It allows an investor to examine the more

specific components of a company's financial health and make better educated investment selections.

Dupont analysis provides a comprehensive view of the company's health. Profitability is

assessed by profit margin, operational efficiency by asset utilization (particularly asset
turnover), and financial leverage by the assets/equity multiplier.
DuPont analysis assists a firm in understanding its strong components and analyzing the
reasons for its growth in order to maintain a healthy performance.
It also aids in identifying poor performance indicators, allowing the organization to better
understand and improve them.
Investors can use DuPont analysis to determine the cause of higher or decreased equity
returns.
DISCUSSION PAGE 04

DUPONT ANALYSIS COMPONENTS

NET PROFIT MARGIN EQUITY MULTIPLIER
This is one of the most fundamental profitability indicators. This monetary figure The equity multiplier, also
represents how much revenue or money a company may create after deducting its known as financial leverage,
production costs, which include raw materials, staff compensation, and other is an indirect assessment of
expenses. It shows how efficient a firm is at converting sales into profits. A high a company's use of debt to
profit margin shows that a company is competent at creating profits and, as a fund its assets. Financial
result, has a higher ROE. A low profit margin, on the other hand, suggests that a leverage measures how
company is inefficient at earning profits and, as a result, has a lower ROE. successfully a firm uses
debt, which is a critical
driver of ROE. A high equity
multiplier suggests that a
ASSETS TURNOVER RATIO company is heavily
The asset turnover ratio assesses how well a corporation generates income from leveraged and hence more
its assets. As a company's total asset turnover ratio rises, so does its return on likely to fail. A low equity
multiplier, on the other hand,
equity. A company's total asset turnover (TAT) ratio is typically negatively related
suggests that a company is
to its net profit margin. This means the higher a company's net profit margin is,
not leveraged and hence has
the lower its asset turnover rate is and vice versa. Because average assets a lesser chance of
include components like as inventories, fluctuations in this ratio might indicate bankruptcy.
that sales are slowing or speeding up sooner than other financial indicators.
DISCUSSION PAGE 05

FORMULA AND CALCULATION OF DUPONT ANALYSIS

DISCUSSION PAGE 06

DIFFERENCES OF DUPONT ANALYSIS TO RETURN ON EQUITY (ROE)

DuPont analysis and Return on Equity (ROE) are both financial metrics
used to evaluate a company's performance, although they approach the
examination from distinct perspectives.
DuPont Analysis: DuPont analysis deconstructs Return on Equity (ROE): ROE, on the other hand, is a
the Return on Equity (ROE) into its constituent simple financial ratio that measures a company's
pieces in order to investigate the causes of the profitability and the efficiency with which it is using its
company's profitability. It divides the ROE into equity. It is calculated as: ROE = Net Income / Average
three parts: profitability, operational efficiency, Shareholders' Equity. This ratio indicates how much
and financial leverage. The DuPont analysis profit a company generates with the money shareholders
formula is ROE = Net Profit Margin * Asset have invested. A higher ROE suggests that the company
Turnover * Equity Multiplier. The analysis assists in is effectively utilizing the funds invested by shareholders
identifying the components that contribute to the to generate profits.
total return on equity, offering insights into what
drives the company's profitability and efficiency.
 DISCUSSION PAGE 07

3 STEP DUPONT
The 3-step DuPont analysis is a
simplified version of the standard
DuPont framework that focuses on
three important financial measures to
determine a company's return on equity
(ROE). It allows for a rapid
understanding of the major drivers of a
company's profitability and efficiency.
The three steps in the 3-step DuPont
analysis are as follows: Net Profit
Margin, Asset Turnover Ratio and Equity
Multiplier.
 DISCUSSION PAGE 08

5 STEP DUPONT
The 5-step DuPont analysis offers a
more comprehensive view by
incorporating two additional factors:
earnings before tax (EBT) and effective
tax rate. It delves deeper into the
company's financial performance by
considering additional elements such as
the company's tax management. This
approach provides a more detailed
understanding of the various
components affecting the company's
ROE.
DISCUSSION PAGE 09

DIFFERENCE OF 3 STEP TO 5 STEP DUPONT

The key difference between the 3-step and 5-step DuPont analyses lies in the depth of the
analysis and the number of factors considered when assessing the return on equity (ROE) of a
company.

The 3-step DuPont analysis focuses on three primary factors: net profit margin, asset turnover, and financial

leverage. It provides a simplified overview of the company's profitability and efficiency. This approach is useful

for a quick assessment and initial understanding of the company's ROE.

The 5-step DuPont derivation can be a bit complicated. To arrive at the 5-step DuPont formula, take the 3-step

DuPont formula and break down the net profit margin formula by replacing the net income with EBT minus Tax

since EBT minus Tax gives net income.

EXAMPLE: #1 PAGE 10
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EXAMPLE: #2
CONCLUSION
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Overall, Dupont is a valuable tool for gaining comprehensive insights on the company's productivity through inner

gatherings, loan finance, or equity. This also provides a more precise assessment of the significance of changes in

a company's ROE. By dividing the Profit from Value (ROE) into three major components: total income, resource

turnover, and equity multiplier. It enables financial backers and investigators to assess several aspects of a

company's operations and identify areas for growth. Integrating the Dupont Analysis into financial analysis can

lead to better informed business decisions.

LIMITATION
Limitations of the Dupont analysis as a monetary assessment device remember its dependence for verifiable

information and suspicions, failure to catch subjective variables, and potential for control. Reactions feature its

restricted concentration and restricted pertinence across businesses.

 PROS AND CONS PAGE 14

Pros: The DuPont analysis model provides a more accurate assessment of the significance of changes

in a company's ROE by focusing on the various means that a company has to increase the ROE

figures. A company can improve any or all of these elements to increase value and returns to

shareholders through its management of costs, choices of financing, and usage of assets. DuPont

analysis helps investors pinpoint the source of increased or decreased equity returns. It can compare a

company’s performance to its competitors, It can identify a company’s strengths and weaknesses and

It is easy to use and understand.

 PROS AND CONS PAGE 15

Cons: A main disadvantage of the DuPont model is that it depends vigorously on accounting data

from an organization's financial statements, some of which can be controlled by organizations, so

they may not be precise. It is a historical analysis, which means it only tells us about a company’s

past performance. It does not take into account the riskiness of a company’s business. Regardless of

whether the information utilized for estimations are dependable, there are as yet extra likely

issues, for example, such as the difficulty of determining the relative values of ratios as good or

bad compared to industry norms.

THANK YOU!
ASARES, KENETH
AREVALO, MARK ANGELO
COMPETENTE, ANGEL JOY
GRAMATA, MARK LOUISE
MIRANDA, MARY ANN
SAN JOSE, IÑIGO KARLO
SANTILLAN, ALVIN