Importance of DuPont Analysis

Many equity investors look into return on equity for judging whether company is generating good return on the investment of the shareholders. However it may not be prudent to look at ROE, instead one should go for DuPont analysis in order to have a better understanding about the return on equity.

DuPont can be calculated as ROE = (net income / sales) * (sales / assets) * (assets / shareholder’s equity)

In the above equation we have ROE broken down into net profit margin which implies that how much profit the company is earning from sales, asset turnover which implies that how efficiently the company is using its assets, and equity multiplier which is a measure of how much the company is leveraged.

If a company’s ROE goes up due to an increase in the net profit margin or asset turnover, it is a positive sign for the company. However, if the ROE is increasing due to equity multiplier, it may not be a good sign indicating that company ROE is increasing due to excess leverage.

Even if a company’s ROE has remained unchanged, assessment in this way can be very helpful. Suppose a company’s net profit margin and asset turnover decreased, that implies that ROE stayed the same due to a large increase in equity multiplier or leverage which is not a good sign for a company.

0 comments… add one

Leave a Comment

Related pages

definition of a planned economyfull disclosure principle gaapadvantages and disadvantages of microeconomicsmixed economy wikimanufacturing overhead examplesadvantages of jit productioncrr and slrprofitability ratios listwhat are the advantages of barter systemmarketing penetration strategy exampleprocess costing advantages and disadvantagesadvantages and disadvantages of a capitalist economycontingent liability examplesautocratic leadership theoryadvantage and disadvantage of payback period methoddifference between a debtor and a creditorexamples of unitary elastic demand goodsadvantages of venture capitaliststypes of factoringauthorized vs issued sharesfifo method of inventorybarter and trade systemadvantages and disadvantages of natural resourcesasset revaluation journal entrieseconomics substitute goodsmateriality concept of accountingadvantages of conglomeratesinternet merits and demeritscharacteristics of managerial accountingunearned revenue accountmeaning of unsystematic riskwhat are the advantages of a command economyexamples current liabilitieshypothecation and mortgage differencemarket skimming pricingmateriality accounting principlesubstitute goods examples economicsdisadvantages of a joint venturedemerits of industrializationadvantages of authoritarianpricing strategies advantages and disadvantageswhat is the meaning of current liabilitiesprocess costing advantages and disadvantagesnarendra modi wiki in hindi languageglobalization drawbacksbond ladder strategywhat is the difference between accounts payable and bills payablecentrally planned economy definitionpenetration pricing strategy examplewhat is factoring in financial managementbill discounting meaning with examplewhy is deflation a problemjournal entry for outstanding salarydifference between accounts receivable and bills receivablewhat are some examples of command economydisadvantages globalizationadvantages activity based costingaccounting materiality principleaccumulated depreciation exampleintroduction of barter systeminferior goods examples in economicsdiminishing method of depreciationthe principle of absolute advantagedefine a mixed economycumulative and non cumulative preference sharesconcept of bookkeepingwhat is full form of cfaprofit push inflation definitioncapitalism weaknessesdefine consigneedemerit of internetdisadvantage of autocratic leadershipdurable vs nondurable goodssubvention meaningprivate goods economicsconglomerate integration