Du Pont Calculation Examples, Illustrations, Concepts, Sample Help Online
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Understanding the concept of Du Pont
Basically, DuPont analysis is a technique which breaks the return on equity (ROE) into three parts. It is a measure to identify what exactly is affecting a company’s return. A company’s return is affected by high profit margin, efficient use of assets to generate more sales and use of more debt in its capital structure.
Return on equity (ROE) measures net income earned by the company for its shareholders. It is calculated by diving net income by average shareholders’ equity.
ROE = Net Income/Average Shareholders’ Equity
Let us multiply and divide the above equation with Sales and Average Total Assets
ROE = (Net Income/Average Shareholders’ Equity) x (Sales/Sales) x (Average Total Assets/Average Total Assets)
ROE = (Net Income/Sales) × (Sales/Average Total Assets) x (Average Total Assets/ Average Shareholders’ Equity)
ROE = Net Profit Margin × Total Assets Turnover Ratio × Financial Leverage Ratio
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Du Pont Calculation Examples Explanation
Example: Suppose X and Y are two companies in shoe-making business. They manufacture and market shoes for women and men respectively. The companies have earned a return on equity of 15%.
Return on equity 15% 15%
Net profit margin 7.5% 10%
Total assets turnover2 1
Financial leverage ratio1 1.5
Y has higher net profit margin, its ability to use its assets to generate sales is average which it has achieved by higher use of debt in its capital structure.
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