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DuPont Analysis

January 23, 2012

The DuPont Analysis is an approach that breaks down ROE (Return on Equity) into a function of 3 or 5 ratios that helps to see the impact of each ratio on ROE.

Suppose you are going through the financial ratios of our company and stop at ROE and wondering what are the factors that are contributing or impacting the ROE. You called your accountant and asked him to find the means through which factors impacting ROE can be tracked. Considering your concern, the accountant is explaining you the two variants of DuPont Analysis.

  • The three part approach

  • The extended five part approach

Original Formula for ROE

return on equity

Now multiply (Revenue/Revenue) with the above mentioned formula and re-arrange the terms

return on equity

Now multiply (Total Assets/Total Assets) and re-arrange the terms

calculation of roe

If we further breaks down the Net Profit Margin, it becomes the extended five part DuPont equation.

calculation of net profit margin

Therefore the extended DuPont equation is

dupont analysis

Procedure for three-part Approach

Step 1: Calculate the Net Profit Margin

net income by revenue

net profit margin

Step 2: Calculate the Asset Turnover Ratio

revenue by total assets

asset turnover ratio

Step 3: Calculate the Financial Leverage

total assets

financial leverage

Step 4: Finally multiply all the three ratios to calculate the ROE

return on equity

Procedure for five-part Approach

Step 1: Calculate the Tax Burden

net income by ebt

tax burden

Step 2: Calculate the Interest Burden

ebt by ebit

interest burden

Step 3: Calculate the EBIT Margin

ebit by revenue

ebit margin

Step 4: Calculate the Asset Turnover Ratio

revenue by total assets

asset turnover ratio

Step 5: Calculate the Financial Leverage

total assets by total equity

financial leverage

Step 6: Finally multiply the entire above calculated ratio together to get the ROE

return on equity

Dupont Analysis Templates to download

I have created a Dupont Analysis template for you, where the subheadings are given and you have to link the model to get the cash numbers! You can download the same from here. You can go through the case and fill in the yellow boxes. I also recommend that you try to create this structure on your own (so that you get a hang of what information is to be recorded).

About Author

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Trusted by Fortune 500 Companies and 10,000 Students from 40+ countries across the globe, it is one of the leading International Training providers for Finance Certifications like FRM®, CFA®, PRM®, Business Analytics, HR Analytics, Financial Modeling, and Operational Risk Modeling. EduPristine has conducted more than 500,000 man-hours of quality training in finance.

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