DuPont Analysis

AAA

DEFINITION of 'DuPont Analysis'

A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). It is also known as "DuPont identity".

DuPont analysis tells us that ROE is affected by three things:
- Operating efficiency, which is measured by profit margin
- Asset use efficiency, which is measured by total asset turnover
- Financial leverage, which is measured by the equity multiplier

ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)

INVESTOPEDIA EXPLAINS 'DuPont Analysis'

It is believed that measuring assets at gross book value removes the incentive to avoid investing in new assets. New asset avoidance can occur as financial accounting depreciation methods artificially produce lower ROEs in the initial years that an asset is placed into service. If ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming.

VIDEO

Loading the player...
RELATED TERMS
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  2. Equity Multiplier

    The ratio of a company’s total assets to its stockholder’s equity. ...
  3. Asset Turnover Ratio

    The amount of sales generated for every dollar's worth of assets. ...
  4. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  5. Profit Margin

    A ratio of profitability calculated as net income divided by ...
  6. Asset

    1. A resource with economic value that an individual, corporation ...
RELATED FAQS
  1. Should I expect growth or income from buying stock in the consumer packaged goods ...

    An annual return can refer to fundamental financial data or income from securities generated by dividends and appreciation. ... Read Full Answer >>
  2. How does DuPont Analysis measure financial leverage?

    DuPont analysis uses something called the "equity multiplier" to measure financial leverage. The equity multiplier is calculated ... Read Full Answer >>
  3. How does DuPont Analysis measure profitability?

    DuPont analysis determines profitability by measuring assets at their gross book value, which produces a greater return on ... Read Full Answer >>
  4. What are some of the advantages and disadvantages of DuPont Analysis?

    DuPont analysis is a potentially helpful tool for analysis that investors can use to make more informed choices regarding ... Read Full Answer >>
  5. Where did DuPont Analysis come from?

    The DuPont Analysis is a method of evaluating a company's financial performance. It was created in 1920 by DuPont, an American ... Read Full Answer >>
  6. Why should investors research the C-suite executives of a company?

    C-suite executives are essential for creating and enacting overall firm strategy and are therefore an important aspect of ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Understanding the DuPont Analysis

    DuPont analysis measures assets at their gross book value, rather than at net book value, in order to produce a higher return on equity (ROE).
  2. Fundamental Analysis

    Decoding DuPont Analysis

    Get a deeper understanding of ROE with these three-step and five-step calculations.
  3. Markets

    ROA And ROE Give Clear Picture Of Corporate Health

    Both measure performance, but sometimes they tell a very different story. This is why they’re best used together.
  4. Economics

    How Return On Equity Can Help You Find Profitable Stocks

    It pays to invest in companies that generate profits more efficiently than their rivals. This is where ROE comes in.
  5. Trading Strategies

    Introduction to Types of Trading: Fundamental Traders

    Learn about the different traders and explore in detail the broader approach that focuses on company-specific events.
  6. Options & Futures

    Reverse Engineering Return On Equity

    Return on equity is a widely used ratio, but return on net operating assets (RNOA) takes things one step farther.
  7. Markets

    Earnings Power Drives Stocks

    Internal return on investment helps determine a stock's ability to propel shareholder returns.
  8. Investing

    Operating Leverage Captures Relationships

    Find out how fixed and variable costs interact to shed new light on old companies.
  9. Investing

    Apple or Google: Which is the Better Bet?

    Apple and Google have made many investors rich since the turn of the century. Which is more appealing going forward?
  10. Fundamental Analysis

    Calculating Net Interest Margin

    Net interest margin is a metric used to measure the effectiveness of a company’s investment decisions, particularly financial institutions.

You May Also Like

Hot Definitions
  1. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  4. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  5. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  6. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
Trading Center