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Dupont Analysis

Updated on March 6, 2023

This concept originated in 1920 and was developed by DuPont Corporation. It is used to analyse the return on equity through three key parameters that drive the ROE (Return on Equity).

Formula of DuPont Analysis – The formula for DuPont Analysis is given below.

ROE as per DuPont analysis = Net profit margin x Total asset turnover x Equity multiplier

The above equation can be further broken down as below.

ROE as per DuPont analysis = Net Income Sales Total Assets
—————– x ————– x ——————-
Sales Total Assets Common Equity

Focus of Dupont analysis

As per the above formula, DuPont Analysis focuses on the three key parameters or components,

Net Profit Margin
Total Asset Turnover
Equity Multiplier

The focus on these individual components helps the company to understand the areas that need more attention to improve the overall ROE. It is also used as an effective tool for comparison of its performance as compared to peers.

Limitation of Dupont Analysis

The core limitation of this type of analysis is the reliance on data that is provided by the company itself and thereby can be easily manipulated. DuPont analysis can be used for comparison between peers within the same industry and not outside this circle.