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VMC: What Is Du Pont Analysis?

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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%.

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.