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The Dupont Analysis is a tool used by businesses to evaluate the many factors that affect their success. It was developed by E. I. Dupont de Nemours and Company, which is now known as DuPont Corporation.
The process works by identifying key factors in the business and measuring them against each other. The analysis can be used to look at any part of the business, from marketing to production to human resources and more. The goal is to identify how each factor affects all of the other factors, so that you can make informed decisions about how you want to proceed with your business.
A satisfactory return on assets might be divided through a high-profit margin, or a rapid turnover of assets, or a combination of both. The Du Pont system causes the analyst to examine the sources of a company's profitability. Since the profit margin is an income statement ratio, a high-profit margin indicates good cost control, whereas a high asset turnover ratio demonstrates efficient use of the assets on the balance sheet.
Different industries have different operating and financial structures. For example, in the heavy capital goods industry the emphasis is on a high-profit margin with a low asset turnover—whereas in food processing, the profit margin is low and the key to satisfactory returns on total assets is a rapid turnover of assets.
Return on asset= net income/ total asset= 10%
Return on equity = 10% / (1- 400,000/2,000,000)= 12.5%
There are many advantages of Dupont analysis; the Dupont method allows an investor to see which particular components of the business are profitable or efficient, as well as those that are not.
The Dupont ratio equation also allows the analyst to see the overall strategy of a company. For example, a company with a high asset turnover and a low profit margin is a company whose strategy depends upon the bulk selling of cheaper products.
Balancing Profit Margin and Asset Turnover with Du Pont System. (2016, Jun 07). Retrieved from https://studymoose.com/dupont-analysis-essay
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