DU PONT ANALYSIS
The Du Pont analysis is a performance measurement started by Du Pont Corporation in 1920s. Here, assets are measured as per their gross book value than at net book value in order to produce a higher ROI (Return On Investments). Measuring assets at gross book value removes the incentive to avoid investing in new assets.
· New asset avoidance occurs as –
Financial accounting depreciation methods artificially produce lower ROIs in the initial years than an asset is placed into service.
· It is used to evaluate a firms effectiveness
· It is a tool to visualize financial data such as ROA (Return On Assets) and ROI.
· Du pont analysis breaks ROE (Return On Equity) into three parts:
- operating efficiency (measured by profit margin)
- asset use efficiency (measured by asset turnover)
- financial leverage (measured by equity multiplier)
ROE = (Net profit / Sales) * (Sales / Assets) * (Assets / Equity)
ROE = (Profit margin) * (Asset turnover) * (Equity multiplier)The Du Pont identity breaks down Return on Equity (that is, the return to equity that investors have contributed to the firm) into three distinct elements. This analysis allows the analyst to understand where superior (or inferior) return is derived from by comparison with companies in similar industries (or between industries).
DU PONT CHART
Net profit margin x Total asset turn over
Net profit / Net sales Net sales / Avg. total assets
Net sales – Total cost C A + F A
(avg cash, bank & debtors, inventories)
(COGS, Operating expenses, Interest)
This analysis allows the analyst to understand where superior return is derived from by comparision with companies in the similar industry.
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