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).

Comments

About the Author
avatar

Pankaj Baheti is a CFA Level III Candidate currently working with Pristine. Prior to Pristine, he was working with Achi Group. He has done his Post Graduate Diploma in Management and loves trekking in the hills of Arunachal.

Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.

Popular Blogs: Whatsapp Revenue Model | CFA vs CPA | CMA vs CPA | ACCA vs CPA | CFA vs FRM

Post ID = 11310