DuPont Analysis (also known as the DuPont identity, DuPont equation, DuPont Model, the strategic profit model or the DuPont method) is an expression which breaks ROE (return on equity) or ROI (return on investment) into three parts.
ROE = (Profit margin)*(Asset turnover)*(Equity multiplier)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity) = (Net Profit/Equity)
- Profitability (measured by profit margin)
- Asset Use efficiency (measured by asset turnover)
- Financial leverage (measured by equity multiplier)
With financial metrics from Financial Statements, ROE analysis enables the analyst to understand the source of superior (or inferior) return by comparison with companies in similar industries (or between industries). Furthermore the return on equity (ROE) ratio is a measure of the rate of return to stockholders. Finally decomposing the ROE into various factors influencing company performance is often called the DuPont system.
In spite of positives and negatives for nearly a century, the DuPont Model can provide business managers insight to understand fundamental drivers of profitability. So for the return on investment is an ideal investment analysis tool. You can refer to detailed explanation of DuPont analysis in Wikipedia.
The DuPont Model Template includes three slides.
Slide 1,ROE (the return on equity ) model analysis in vertical direction for Dupont analysis
Slide 2, ROI (the return on investment) model analysis in vertical direction for Dupont analysis
Slide 3, the same model analysis as above in horizontal direction for Dupont analysis
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