Dopont Model Analysis

Introduction

Du-pont is very useful and helpful tool for manager, investors, and analyst that is created in 1920s by American Chemical Manufacturing Giant, Dupont Corporation for the purpose analyzing operation efficiency in the organization.

Du-pont analysis is an extended examination of Return on Equity (ROE) of a company which analysis Net Profit Margin, Assets Turnover, and Financial Leverage or Equity Multiplier Ratio. In simple words, it breaks down the ROE to analyze how corporate can increase the return for their shareholders.

DuPont Analysis

  • Net Profit Margin is related to Profitability Ratio

  • Total Assets Turnover is related to Efficiency Ratio

  • Equity Multiplier is related to Leverage Ratio

Derivation of Du-pont Model 

Derivation of DuPont Model

Components of Du-Pont Analysis

The following are the five components of Du-Pont Analysis listed as bellows:

  1. Net profit Margin Ratio: It compares total net profit to total sales. It measures the profitability ratio of the company.

  2. Total Assets Turnover Ratio: It compares total net sales to total assets. It measures efficiency ratio of the company.

  3. Equity Multiplier: It compares total assets to total shareholder's equity. It measures leverage ratio of the company.

  4. Return on Assets: It provides total net profit over total assets. It measures the profitability ratio of the company.

  5. Return on Equity: It compares total assets to total shareholder's equity. It measures the profitability ratio of the company.

It also provide various others ratios like Net Operating Ratio, Cost of Goods Sold Ratio, Gross Profit Margin, Fixed Assets Turnover ratio, Current Assets Turnover Ratio, Capital Employed Ratio etc.

Conclusion

Du-Pont models breaks down the ROE to analyze how corporate can increase the return for their shareholders. After breaking the ROE, there are three ratio comes in as Net Profit Margin, Total Assets Turnover and Equity Multiplier. It also provides various other ratio such as Net Operating Ratio, Cost of Goods Sold Ratio etc.

Come On, Tell Me What You Think!

Did I miss something?  Come on! Tell me what you think about this post on Du-Pont equation for ROA and ROE in the comments section.


Comments

Post a Comment

If you've any doubts or suggestions please let me know.

Popular posts from this blog

Accounting for Inventory

Image
Introduction Inventory is one of the most visible and tangible aspects of doing business. Raw material, Goods in process or Work-in-Process and Finished goods all represents various forms of inventory. Each type represents money tied up until the inventory leaves the company as purchased products. Likewise, merchandise stocks in a wholesale or retail store contribute to profits only when their sale puts money into the cash register. In literate sense, inventory refers to stock of anything necessary to do business. These stocks represents a large portion of the business investment and must be well managed in order to maximize profits. Meaning and Nature of Inventory Every business organization needs inventory for smooth running of its activities. It serves as link between production and distribution processes. Inventory is the quantity of goods held by a merchandising company for resale to customers. Merchandising companies determine the quantity of investment items by a physical counts
Read more

Balance Sheet

Image
Introduction A balance sheet is a financial statement that summarizes a company's assets. liabilities and shareholders' equity at a specific period of time. In other words, It is a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time. It is one of the three fundamental financial statements (Income Statement, Balance Sheet, Cash Flow Statement). Usually, It is prepared in every quarter, six months or one year depending on company's and law's requirements. Components of Balance Sheet   Assets : Assets are the items or properties owned by person or company having value to meet various financial needs. The assets can be classified into three categories. They are Real Assets: It is also known as Fixed Assets or Non-Current Assets. Those assets which can not be converted quickly into cash. These assets are also called physical assets due to inherent physical worth. Basically, its has purchased  for long-term
Read more

The Worksheet

Image
Meaning of Worksheet Work sheet is a scratch pad tool for accountants outside the accounting system. It is not a formal step in accounting cycle ; rather it is the rough work done for some purpose, hence the phrase scratch pad. The accountants work out the details of the end-of-period adjustments and get a preview of the financial statements using the work sheet.  Work sheet is a schedule of data showing the relationship among (1) adjusting entries (2)  adjusted trial balance , and (3) financial statements. Unadjusted trial balance is a temporary trial balance prepared before considering year-end adjustments.  Adjusting journal entries is process of adjusting year-end adjustment with the unadjusted trial balance. Adjusted trial balance is a permanent trial balance that is prepared after adjusting the year-end adjustments.   Work sheet is also known as 'extended trial balance' (ETB). This terminology is quite popular in the British accounting literature. Importants of Work Shee
Read more