DuPont Analysis Calculator

DuPont Analysis

It is an approach for computing return on equity (ROE) encompassing a broad level of indicators leading to this return. DuPont analysis calculator calculates this ROE using three different factors. These factors include operating efficiency, the efficiency of assets in generating revenues, and the efficiency of assets in earning for shareholders’ funds. So, it is a combination of Operating performance, resource utilization (assets use), and deployment of funds.

Return on equity (ROE) is a measure to determine the efficiency of a company in earning returns on the money invested by the equity shareholders. An investor will always be willing to invest in a company that commands a higher return on equity.

Formula

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)

Where,

  • 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 utilization of assets in generating revenues.
  • Assets/Shareholders’ Equity is financial leverage or equity multiplier. Or how best the funds has 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 for explaining the effect of different factors in the calculation of ROE.

DuPont Analysis Calculator

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 in the balance sheet of the company.

Shareholders’ Equity

Shareholders’ equity includes equity capital and reserves and surplus available with the company. This is per se the kitty of shareholders.

Example

Let us try to understand the concept well with the help of an example. The data of three companies (X, Y, and Z) are given as below:

ParticularCompany XCompany YCompany Z
Net Income40,00050,00052,000
Sales198,000500,500325,200
Total Assets660,0001,668,3351,084,000
Shareholders’ Equity330,000501,000429,043

The three factors under DuPont analysis are:

FactorsFormulaXYZ
Net Margin (a)Net Income/Sales0.200.990.16
Asset Turnover (b)Sales/Total Assets0.30.30.3
Financial Leverage (c)Total Assets/Shareholders’ Equity23.332.53

The ROE under DuPont analysis is (a*b*c):

Company X = 0.2*0.3*2 = 0.12 or 12%

Company Y = 0.99*0.3*3.33 = 0.989 or 9.89%

And, Company Z = 0.16*0.3*2.53 = 0.12 or 12%

Explanation

In the above example, the ROE of companies X and Z is 12%. While the ROE of company Y is 9.89% which means company X and Z are better at generating returns for investors (shareholders) in comparison to company Y.

Du Pont’s analysis gives a different dimension to our understanding, though the ROE remains the same by this method or other shortcut methods. However, here if we observe the asset utilization efficiency is almost the same for all the three entities. However, there is wide variance with regard to the profit margin and financial leverage. Of course, in isolation, it does not say anything unless it is compared with a company belonging to the same industry segment. However, if all three belongs to the same industry then management can think about how to improve the margin and effective funds deployment. And that can lead to an improvement in the ROE

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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