DuPont Analysis


 

Dupont Analysis is always a good place to start because it measures return on equity. A company exists to generate wealth for its investors/owners. ROE provides indication of how much wealth is created using the investment made. ROE is , therefore arguably one of the most important ratio, as it indicates the rate at which wealth is increasing. While DUPONT Analysis doesn't provide full financial analysis but it is a good starting point to perform detailed financial analysis.

ROE3

 

In DUPONT analysis the ROE is decomsed into profitability, Efficiency and leverage ratios. These ratios provide good overview of how good company is at generating wealth (profitability), how good is the company at using its assets(Efficiency), how good the company is at managing the equity to create assets(Leverage).

 

        Return on Equity  = Net Income/Equity

                                     = Net Income/Sales * Sales/Assets * Assets/Equity

                                     = Profitability * Efficiency * Leverage

 

 

Profitability From ROE

A profitability ratio is a measure of profitability, which is a way to measure a company's performance. Profitability is simply the capacity to make a profit, and a profit is what is left over from income earned after you have deducted all costs and expenses related to earning the income.

 

Profitability

 

 

Efficiency From ROE

The efficiency ratio is a ratio that is typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general use of inventory and machinery.

 

Efficiency

 

 

Leverage From ROE

The financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations

Leverage