The DuPont Analysis Formula (includes calculator)
DuPont Analysis, or DuPont Identity, offers a more detailed analysis when evaluating the return-on-equity (ROE) of a company. The measure was conceived by the DuPont Corporation in the 1920s to evaluate profitability, operating efficiency and leverage, all within the ROE analysis. Many financial analysts believe that the DuPont Analysis provides an excellent snapshot of a company’s financial strength.
Traditional ROE v. DuPont Analysis
The return-on-equity measure is widely used by investors to determine how efficiently a company is using its money. There are two ways of calculating ROE: the traditional approach and the DuPont formula. Under the traditional formula, the company’s net profit after taxes for the past 12 months is divided by shareholder equity. As this approach fails to account for the effect of borrowed funds, the DuPont Analysis formula was developed to link the use of debt to the outcome.
The idea behind the more detailed DuPont Analysis is that companies that demonstrate a higher ROE with minimal debt can expand without large capital outlays, allowing its owners to access cash generated by the business for consumption or re-investment. In other words, two companies can have the same ROE, yet one may be much more efficient.
How to Collect Data for this Calculation
(1) Go to Yahoo! Finance and enter the stock symbol in the Get Quotes window
(2) On the lower left-hand side under Financials, click on Income Statement to collect the profit and sales information
(3) Click on Balance Sheet to collect the assets and equity information
The Elements of the DuPont Analysis
Net Profit Margin: The profit margin offers an indication of how much profit a company makes for every dollar of revenue it generates. While profit margins vary by industry, in general, the higher a company’s profit margin compared to its competitors, the better.
Asset Turnover: Asset turnover provides a measure of a firm’s efficiency in the use of its assets in to generate revenue. The higher the number the better. Looking at asset turnover can also help an investor to understand the company’s pricing strategy as companies with lower profit margins tend to see higher asset turnover.
Equity Multiplier: The equity multiplier is used to measure of financial leverage, allowing the investor to determine what portion of the ROE is the result of debt. Savvy investors understand that it is possible for a company with weak sales results and poor margins to artificially increase its ROE by taking on an extraordinary amount of debt.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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