Dupont Analysis

A Modification On Calculating Return On Equity

By Kunal Janyani
The DuPont analysis (also known as the DuPont identity or DuPont model) is a
framework for analyzing fundamental performance popularized by the DuPont
Corporation.

It is a useful technique used to decompose the different drivers of return on

equity (ROE).

The decomposition of ROE allows investors to focus on the key metrics of

financial performance individually to identify strengths and weaknesses.
DuPont Analysis vs. ROE
The return on equity (ROE) metric is net
income divided by shareholders’ equity. The
Dupont analysis is still the ROE, just an
expanded version. The ROE calculation alone
reveals how well a company utilizes capital
from shareholders.
With a Dupont analysis, investors and analysts
can dig into what drives changes in ROE, or
why an ROE is considered high or low. That is,
a Dupont analysis can help deduce whether its
profitability, use of assets or debt that’s
driving ROE.
DuPont Analysis • DuPont analysis breaks ROE into its constituent components
to determine which of these factors are most responsible for
Components changes in ROE.
Net Profit Margin
Asset Turnover Ratio Financial Leverage
The net profit margin is the
ratio of bottom-line profits Financial leverage, or the
The asset turnover ratio
compared to total revenue equity multiplier, is an
measures how efficiently a
or total sales. This is one of indirect analysis of a
company uses its assets to
the most basic measures company's use of debt to
generate revenue.
of profitability. finance its assets.
 Formula of Calculation of Dupont Analysis

Dupont Analysis = Net Where- Asset Turnover=Average  Equity Multiplier=Average 

profit margin x Asset Net Profit Margin=Revenue Total Assets/Sales Shareholders’ Equity
Turnover x Equity /Net Income​ /Average Total Assets​
Multiplier
 Example
Company A YEAR 1 (INR) YEAR 2 ( INR) Company B YEAR 1 (INR) YEAR 2 (INR)

Net Income 1,00,000 1,20,000 Net Income 2,10,000 2,10,000

Revenue 10,00,000 10,00,000 Revenue 17,50,000 17,50,000

Profit Margin 0.1 0.12 Profit Margin 0.12 0.12

Revenue 10,00,000 10,00,000 Revenue 17,50,000 17,50,000

Avg. Assets 5,00,000 4,80,000 Avg. Assets 8,75,000 8,75,000

Assets Turnover 2 2.08 Assets Turnover 2 2

Avg. Assets 5,00,000 4,80,000 Avg. Assets 8,75,000 8,75,000

Avg. Equity 2,00,000 2,00,000 Avg. Equity 5,00,000 3,50,000

Financial Leverage 2.5 2.4 Financial Leverage 1.75 2.5

ROE 50% 60% ROE 42% 60%

Conclusion
• If there is an increase in the Net Profit Margin without a
change in the Financial Leverage, it indicates that the
profits of the company are increasing organically.
• But, if the Financial Leverage is the sole reason behind a
high ROE, it’s risky because the company is focused on
utilizing its debt and that’s an alarming sign.
• Thus, we need to check whether the growth in company’s
profitability is due to increase in Net Profit Margin or Asset
Turnover Ratio (which is a good sign) or only due to
Financial Leverage (which is bad sign).