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Assignment on

The DuPont Analysis

Submitted to

Dr. Md. Rafiqul Islam


Course Teacher &
Director, EMBA Program

for the course of

Financial Analysis and Control


Course No. CB 203

Submitted by

Md. Ashiqur Rahman


ID: 50712062

EMBA Program
Department of Banking
University of Dhaka

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DuPont Analysis:

DuPont Analysis is a method of performance measurement that was started


by the DuPont Corporation in the 1920s. With this method, assets are
measured at their gross book value rather than at net book value in order to
produce a higher Return on Equity (ROE). It is also known as "DuPont
identity".

DuPont analysis tells us that ROE is affected by three things:


 Operating efficiency, which is measured by profit margin
 Asset use efficiency, which is measured by total asset turnover
 Financial leverage, which is measured by the equity multiplier

The DuPont 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 enables the analyst to understand the source of
superior (or inferior) return by comparison with companies in similar
industries (or between industries).

The DuPont identity, however, is less useful for some industries, such as
investment banking, that do not use certain concepts or for which the
concepts are less meaningful. Variations may be used in certain industries,
as long as they also respect the underlying structure of the DuPont identity.
DuPont analysis relies upon the accounting identity, that is, a statement
(formula) that is by definition true.

The return on investment (ROI) ratio developed by DuPont for its own use is
now used by many firms to evaluate how effectively assets are used. It
measures the combined effects of profit margins and asset turnover.

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The return on equity (ROE) ratio is a measure of the rate of return to
stockholders. Decomposing the ROE into various factors influencing
company performance is often called the DuPont system.

Where,

Net profit = net profit after taxes


Equity = shareholders' equity
EBIT = Earnings before interest and taxes
Sales = Net sales

This decomposition presents various ratios used in fundamental analysis.


 The company's tax burden is (Net profit ÷ Pretax profit). This is the
proportion of the company's profits retained after paying income
taxes.
 The company's interest burden is (Pretax profit ÷ EBIT). This will be
1.00 for a firm with no debt or financial leverage.
 The company's operating profit margin or return on sales (ROS) is
(EBIT ÷ Sales). This is the operating profit per dollar of sales.
 The company's asset turnover (ATO) is (Sales ÷ Assets).
 The company's leverage ratio is (Assets ÷ Equity), which is equal to
the firm's debt to equity ratio + 1. This is a measure of financial
leverage.
 The company's return on assets (ROA) is (Return on sales x Asset
turnover).
 The company's compound leverage factor is (Interest burden x
Leverage).

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ROE can also be stated as:

ROE = Tax burden x Interest burden x Margin x Turnover x Leverage


ROE = Tax burden x ROA x Compound leverage factor

Profit margin is (Net profit ÷ Sales), so the ROE equation can be restated:

In diagrammatic view DuPont Model can be expressed as:

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