What is DuPont analysis?

Variation on calculation of return on equity (ROE), which uses a gross value for assets (ignoring accumulated depreciation) not net value for assets so as to come up with higher ROE is called DuPoint analysis. The modification was developed by DuPoint Corporation in 1920’s.

DuPont Analysis

DuPont Analysis

Formula

ROE = Profit Margin x Asset Turnover x Equity Multiplier

Profit Margin = Measure of operating efficiency

Asset Turnover = Measures asset use efficiency

Equity Multiplier = Measures amount of financial leverage used by company

Reason behind method use

Using the method, managers gain most out of the assets placed with them unlike in case of net asset values where ROE comes out lower due to accumulated depreciation.

Just using basic ROE analysis may give out confusing results, but DuPoint method helps an investor to conclude the basis due to which the total ROE number changed.

If there is an increase in the profit margin or asset turnover portions of the ROE, it means good company is in hands of good managers. Nevertheless, if ROE comes out higher as company has borrowed more money (higher financial leverage), this designates that the company is a risky investment.

Ashish Pandey

I am a business journalist who is currently employed at Zee Business. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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