The DuPont Analysis tool assesses the ability of a company to improve its Return on Equity (ROE), which measures the profitability of a business with respect to equity. The analysis came up as a blessing for investors and financial analysts as it helps them decompose the factors leading to profits and thereby enhance the same for better performance in the future.
Explanation
DuPont Analysis helps a business be aware of the contribution of each part of the ROE in determining its growth and profitability. Therefore, it is considered the fundamental tool for a performance assessment that analyses different parameters and factors affecting investor returns.
For example, when the net profit margin of a company is more, it is difficult to say whether it is the increased revenue that has led to the enhanced profits or reduced expenses or costs. DuPont Analysis is the technique that can help a business identify the contribution of revenue and expenses individually to assess their performance separately. As a result, companies get an opportunity to improve the performance of all individual factors accordingly.
The Components
The Return on Equity on which the entire DuPont Analysis is based is divided into the following components:
Profit Margin
Net Profit Margin is the ratio of net sales to revenue. It is the measure of the profitability of a business.
The profit margin of a business is affected positively by either the decrease in the owner cost or the increase in the prices. This is why the volatility of stocks of a particular company fluctuates with the change in its costs, prices, or other guidelines.
Asset Turnover
Asset turnover measures the efficiency with which businesses utilize assets to generate revenue.
This ratio helps assess the performance of two companies having similar characteristics.
Financial Leverage
Financial leverage is a liquidity ratio that indicates the total capital being funded by shareholders and by debt. It is expressed as:
Where,
Equity = Assets – Liabilities
The Models
The Dupont analysis models are available in three forms. All three forms, however, are derived from the very basic ROE expression:
Three-Step Model
The three-step model can be derived from the above equation by multiplying Asset Turnover and Financial Leverage Ratios.
Thus, the Three-Step DuPont Analysis indicates that when the ROE of a company is high, it is either because of the increase in the Net Profit Margin Asset Turnover or increased debt capital.
Five-Step Model
The Five-Step model is derived from the two-step model formula of ROE, i.e.:
Example with Calculation
Let’s say DuPont Analysis is to be used to check which company between A and B is performing better. Which one is a better performer?
To do so, here are the details to know, which have already been shared:
Company ACompany BNet profit margin = 35Net profit margin = 28Asset Turnover Ratio = 0.5Asset Turnover Ratio = 0.5Financial leverage ratio = 0.8Financial leverage ratio = 1
Example Answer: Though the ROE of both the companies is the same, the DuPont analysis still helps to figure out the better performer, which is company A in this context. Why?
Answer Explanation: Net Profit Margin of Company A is better than B and requires LOWER leverage than Company B to complete. Hence it can be concluded that with even lower leverage, Company A performs better
1 Nov 2018 – This report focuses on top manufacturers in Global Market.The Global Polyethylene Naphthalate Market size is expected to value at USD 1.40 billion by 2022.
Polyethylene naphthalate (PEN) is also adopted in various packaging solutions in order to improve thermal and barrier properties.Use of polyethylene naphthalate (PEN) enhances corrosion resistance by limiting oxidation.
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Global Feed Enzymes Market categorizes the Global Industry by Type, Livestock, Form and Region | Feed Enzymes Industry
Feed enzymes are either plant-derived or chemical ingredients used to boost the quality of the animal nutrition as well as nutritional properties of the animal fodder.
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According to the current analysis of Reports and Data, the global Phenoxyethanol Preservatives market was valued at USD 131.6 Million in 2019 and is expected to reach USD 203.5 Million by the year 2027, at a CAGR of 5.6%.
These antimicrobial properties against mold formation, bacteria, and yeast are expected to be one of the factors propelling the growth of the global market in the coming years.
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With the presence of several companies involved in the production of phenoxyethanol preservatives, the Asia-Pacific region will witness considerable growth throughout the predicted period.
This region is proposed to remain the dominant regional segment with a significant CAGR during 2020-2027.
The growing demand from various end users such as textiles, packaging and agriculture is expected to drive the demand for Benzene Market.Benzol Market Size – USD 82.04 Billion in 2018, Market Growth - CAGR of 3.8%, Market Trends – Rapid expansion in the APAC region.Reports and Data recently added Global Benzol Market research report to its ever expanding database that provides a thorough investigation of the market scenario of the market size, share, demand, growth, trends.
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