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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 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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EduPristine is a member of Adtalem Global Education (NYSE: ATGE), a global education provider headquartered in the United States. Adtalem is a 3 billion dollars (20,000 crores) company that has about 9 institutions and companies with more than 16,000 employees spread across 145 locations. Adtalem takes pride in training 142,000 degree-seeking students all over the world.The organization's purpose is to empower students to achieve their goals, find success and make inspiring contributions to our global community. EduPristine is one of India's leading training providers in Analytics, Accounting, Finance, Healthcare, and Marketing. Founded in 2008, EduPristine has a strong online platform and network of classrooms across India and caters to self-paced learning and online learning, in addition to classroom learning

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