Table of Contents
- What Is the DuPont Analysis?
- Key Takeaways
- How the DuPont Analysis Works
- Formula and Calculation of the DuPont Analysis
- Components of the DuPont Analysis
- Net Profit Margin
- Asset Turnover Ratio
- Financial Leverage
- Drawbacks of the DuPont Analysis
- Example of the DuPont Analysis
- A Real-World Example
- What Does the DuPont Analysis Tell You?
- What Is the Difference Between the 3-Step and the 5-Step DuPont Analysis?
- Why Is It Called DuPont Analysis?
- What Are Some Limitations of Using the DuPont Analysis?
- The Bottom Line
What Is the DuPont Analysis?
Let me explain the DuPont analysis to you—it's a framework I use to analyze a company's fundamental performance. Developed decades ago at DuPont de Nemours, Inc., this tool breaks down the drivers of return on equity (ROE), so you can focus on them one by one and spot strengths or weaknesses.
You'll find two versions: a three-step one and a five-step one. Stick with me as I walk you through it.
Key Takeaways
DuPont analysis separates the drivers of ROE, like profitability and asset utilization, into clear parts. You can use it as a manager to fix weaknesses or as an investor to compare how efficiently two similar companies operate. Remember, this formula has been around since 1919.
How the DuPont Analysis Works
The DuPont analysis evaluates a company's financial performance through its ROE. You calculate ROE by dividing net income by shareholders' equity—it shows how well the company uses shareholder capital.
What makes DuPont stand out is it digs deeper, letting you see which activities most affect ROE changes. As an investor, you can compare operational efficiency between similar firms, and as a manager, you identify what needs fixing.
The three main metrics driving ROE are operating efficiency (net profit margin), asset use efficiency (asset turnover ratio), and financial leverage (equity multiplier).
Formula and Calculation of the DuPont Analysis
Here's the formula: DuPont Analysis = Net Profit Margin × Asset Turnover × Equity Multiplier.
Net Profit Margin is Net Income divided by Revenue. Asset Turnover is Sales divided by Average Total Assets. Equity Multiplier is Average Total Assets divided by Average Shareholders’ Equity.
You multiply these together to get an expanded view of ROE. It's also called the DuPont identity or model.
Components of the DuPont Analysis
DuPont breaks ROE into components so you can see what's driving changes.
Net Profit Margin
This is your bottom-line profits over total revenue— a basic profitability measure. If a store sells a product for $1 and keeps $0.15 after costs, that's a 15% margin. Improve it by cutting costs or raising prices, and it boosts ROE significantly. That's why stock volatility spikes with margin guidance changes.
Asset Turnover Ratio
This shows how efficiently assets generate revenue. If $100 in assets produce $1,000 in revenue, the ratio is 10. It varies by industry—retailers have high ratios with low margins, utilities have low ones due to expensive assets. Compare within industries; rising turnover improves ROE and signals sales shifts early.
Financial Leverage
This is the equity multiplier, analyzing debt use for assets. If assets are $1,000 and equity $250, the ratio is 4, meaning $750 in debt. Companies need some debt for growth, but too much creates risks. Use averages from the balance sheet for this calculation.
Drawbacks of the DuPont Analysis
The main issue is it relies on accounting data that can be manipulated. It doesn't explain why ratios are high or low, or if they're good or bad without context.
Example of the DuPont Analysis
Suppose you're watching SuperCo and Gear Inc., both with improved ROE. Using DuPont, you see SuperCo boosted margins and turnover while reducing debt—sustainable gains. Gear just added leverage without income or margin changes, which raises concerns about real value.
A Real-World Example
Take Walmart for fiscal year ending Jan. 31, 2025: Net income $19.4 billion, revenue $681.0 billion, assets $260.8 billion, equity $97.4 billion. That gives a profit margin of 2.85%, asset turnover of 2.61, leverage of 2.68, and ROE of 19.9%.
What Does the DuPont Analysis Tell You?
It reveals what drives ROE changes, helping you compare firms' efficiencies.
What Is the Difference Between the 3-Step and the 5-Step DuPont Analysis?
The 3-step is ROE = (Net Income/Sales) × (Sales/Assets) × (Assets/Equity). The 5-step adds tax and interest: ROE = (EBT/Sales) × (Sales/Assets) × (Assets/Equity) × (1 - Tax Rate).
Why Is It Called DuPont Analysis?
It was developed at DuPont de Nemours, Inc.
What Are Some Limitations of Using the DuPont Analysis?
It depends on accurate inputs from financial statements, which may not be reliable. Ratios need industry context, and seasonal factors or accounting differences can distort comparisons.
The Bottom Line
DuPont analysis helps you evaluate ROE components, understand shifts, and compare competitors. Just remember its limits tied to input quality.
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