DuPont Analysis is an approach that breaks the Return on Equity (ROE) into a more detailed expression, thereby overcoming the shortcomings or loopholes of conventional ROE. It was developed by DuPont Corporation in the 1920s. DuPont analysis interprets the basic ROE ratio to provide a great insight into the company’s performance.
The formula for calculating ROE using DuPont Analysis is:
Return on Equity = Net Margin * Assets Turnover Ratio * Financial Leverage
To put the above formula in simple terms, consider the following formula.
Return on Equity = (Net Income/Sales) * (Sales/Assets) * (Assets/Shareholders’ Equity)
- Net Income/Sale is formula for calculating net margin, which determines operating efficiency.
- Sales/Assets is for calculating asset turnover ratio. This determines the efficiency in the utilization of assets in generating revenues.
- Assets/Shareholders’ Equity is financial leverage or equity multiplier. Or how best the funds have been used to generate the returns.
The above formula can be simply written as Net Income/Shareholders’ Equity, which is also the most commonly used formula of return on equity. But, the formula under the DuPont analysis is used to explain the effect of different factors in calculating ROE.
DuPont Analysis Calculator
How to Calculate using Calculator?
Enter the following figures into the DuPont analysis calculator for quickly calculating return on equity.
Net Income – The income of the company after paying off tax liability is its net income. This figure can be easily obtained from the statement of income and expenses.
Sales – Enter the amount of net sales that is, total sales after deducting sales returns (if any). This represents the revenue of the company from its operations.
Total Asset – Enter the amount of total assets of the company. This figure is simply available on the balance sheet of the company.
Shareholders’ Equity – Shareholders’ equity includes equity capital and reserves and surplus available with the company. This is, per see, the kitty of shareholders.