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GraphicalrepresentationofDuPontanalysis.

DuPontanalysisFromWikipedia,thefreeencyclopedia

DuPontAnalysis(alsoknownasthedupontidentity,DuPontequation,DuPontModelortheDuPontmethod)isanexpressionwhichbreaksROE(returnonequity)intothreeparts.

ThenamecomesfromtheDuPontCorporationthatstartedusingthisformulainthe1920s.

Contents

1Basicformula2ROEanalysis

2.1Examples2.1.1Highmarginindustries2.1.2Highturnoverindustries2.1.3Highleverageindustries

3ROAandROEratio4References5Externallinks

Basicformula

ROE=(Profitmargin)*(Assetturnover)*(Equitymultiplier)=(Netprofit/Sales)*(Sales/Assets)*(Assets/Equity)=(NetProfit/Equity)

Profitability(measuredbyprofitmargin)Operatingefficiency(measuredbyassetturnover)Financialleverage(measuredbyequitymultiplier)

ROEanalysis

TheDuPontidentitybreaksdownReturnonEquity(thatis,thereturnsthatinvestorsreceivefromthefirm)intothreedistinctelements.Thisanalysisenablestheanalysttounderstandthesourceofsuperior(orinferior)returnbycomparisonwithcompaniesinsimilarindustries(orbetweenindustries).

TheDuPontidentityislessusefulforindustriessuchasinvestmentbanking,inwhichtheunderlyingelementsarenotmeaningful.VariationsoftheDuPontidentityhavebeendevelopedforindustrieswheretheelementsareweaklymeaningful.

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DuPontanalysisreliesupontheaccountingidentity,thatis,astatement(formula)thatisbydefinitiontrue.

Examples

Highmarginindustries

Otherindustries,suchasfashion,mayderiveasubstantialportionoftheircompetitiveadvantagefromsellingatahighermargin,ratherthanhighersales.Forhighendfashionbrands,increasingsaleswithoutsacrificingmarginmaybecritical.TheDuPontidentityallowsanalyststodeterminewhichoftheelementsisdominantinanychangeofROE.

Highturnoverindustries

Certaintypesofretailoperations,particularlystores,mayhaveverylowprofitmarginsonsales,andrelativelymoderateleverage.Incontrast,though,groceriesmayhaveveryhighturnover,sellingasignificantmultipleoftheirassetsperyear.TheROEofsuchfirmsmaybeparticularlydependentonperformanceofthismetric,andhenceassetturnovermaybestudiedextremelycarefullyforsignsofunder,or,overperformance.Forexample,samestoresalesofmanyretailersisconsideredimportantasanindicationthatthefirmisderivinggreaterprofitsfromexistingstores(ratherthanshowingimprovedperformancebycontinuallyopeningstores).

Highleverageindustries

Somesectors,suchasthefinancialsector,relyonhighleveragetogenerateacceptableROE.Otherindustrieswouldseehighlevelsofleverageasunacceptablyrisky.DuPontanalysisenablesthirdpartiesthatrelyprimarilyonthefinancialstatementstocompareleverageamongsimilarcompanies.

ROAandROEratio

Thereturnonassets(ROA)ratiodevelopedbyDuPontforitsownuseisnowusedbymanyfirmstoevaluatehoweffectivelyassetsareused.Itmeasuresthecombinedeffectsofprofitmarginsandassetturnover.[1]

Thereturnonequity(ROE)ratioisameasureoftherateofreturntostockholders.[2]DecomposingtheROEintovariousfactorsinfluencingcompanyperformanceisoftencalledtheDuPontsystem.[3]

Where

Netincome=netincomeaftertaxesEquity=shareholders'equityEBIT=Earningsbeforeinterestandtaxes

Thisdecompositionpresentsvariousratiosusedinfundamentalanalysis.

Thecompany'staxburdenis(NetincomePretaxprofit).Thisistheproportionofthecompany'sprofitsretainedafterpayingincometaxes.[NI/EBT]

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Thecompany'sinterestburdenis(PretaxincomeEBIT).Thiswillbe1.00forafirmwithnodebtorfinancialleverage.[EBT/EBIT]Thecompany'soperatingincomemarginorreturnonsales(ROS)is(EBITSales).Thisistheoperatingincomeperdollarofsales.[EBIT/Sales]Thecompany'sassetturnover(ATO)is(SalesAssets).Thecompany'sleverageratiois(AssetsEquity),whichisequaltothefirm's[[debttoequityratio]+1].Thisisameasureoffinancialleverage.Thecompany'sreturnonassets(ROA)is(ReturnonsalesxAssetturnover).Thecompany'scompoundleveragefactoris(InterestburdenxLeverage).

ROEcanalsobestatedas:[4]

ROE=TaxburdenxInterestburdenxMarginxTurnoverxLeverageROE=TaxburdenxROAxCompoundleveragefactor

Profitmarginis(NetincomeSales),sotheROEequationcanberestated:

References1. Groppelli,AngelicoA.EhsanNikbakht(2000).Finance,4thed.Barron'sEducationalSeries,Inc.pp.444445.

ISBN0764112759.2. Groppelli,AngelicoA.EhsanNikbakht(2000).Finance,4thed.Barron'sEducationalSeries,Inc.p.444.ISBN0

764112759.3. Bodie,ZaneAlexKaneAlanJ.Marcus(2004).EssentialsofInvestments,5thed.McGrawHillIrwin.pp.458459.

ISBN0072510773.4. Bodie,ZaneAlexKaneAlanJ.Marcus(2004).EssentialsofInvestments,5thed.McGrawHillIrwin.p.460.

ISBN0072510773.

Externallinks

FreeVideoTutorialonDuPontAnalysis(http://www.youtube.com/watch?v=B9swKCSx_lQ)DecodingDuPontAnalysis(http://www.investopedia.com/articles/fundamentalanalysis/08/dupontanalysis.asp)DuPontanalysis(http://es.slideshare.net/HECTORADRI/anlisisdupontexcelwithintuitive)

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Categories: Financialratios DuPont

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