Definition of Du Pont Analysis
- The Du Pont analysis was created by the Du Pont corporation and is similar to the Return on Equity (ROE) but more accurate.
- The Du Pont analysis is known to decompose the drivers of ROE.
- The Du Pont analysis helps you understand the strengths and weaknesses of a company.
What is the Formula for Du Pont Analysis?
- The formula for the Du Pont is the Net Profit Margin multiplied by the Asset Turnover and Equity Multiplier.
Net Profit Margin x AT x EM
(Where AT = asset turnover and EM = equity multiplier)
- The Net Profit Margin can be calculated by dividing the Net Income by the Revenue.
Net Income ÷ Revenue
- The AT can be calculated by dividing the Sales by the Average Total Assets.
Sales ÷ Average Total Assets
- The EM can be calculated by dividing the Average Total Assets by the Average Total Shareholder’s Equity.
Average Total Assets ÷ Average Total Shareholder’s Equity
Du Pont Analysis in Practice
- Joe’s Pizzeria has a net profit margin of 25%. The asset turnover for the pizzeria 0.3 and the financial leverage multiplier is 0.4. What is the ROE based on the Du Pont Analysis?
- 0.25 x 0.3 x 0.4 = 0.03
- 0.03 x 100 = 3%
- Therefore the ROE based on the Du Pont Analysis is 3%.