DuPont Analysis

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What is the 'DuPont Analysis'

The DuPont analysis is 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)

BREAKING DOWN '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.

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RELATED FAQS
  1. How does DuPont Analysis measure profitability?

    Discover how the DuPont analysis system breaks down a company’s return on equity into three parts to fully analyze its efficiency ... Read Answer >>
  2. Where did DuPont Analysis come from?

    Learn the origins of the DuPont Analysis and how it evaluates the company's financial health by looking at more than profit ... Read Answer >>
  3. What are some of the advantages and disadvantages of DuPont Analysis?

    Learn about the DuPont analysis financial ratio, and understand some of its primary advantages and disadvantages. Read Answer >>
  4. How does DuPont Analysis measure operating efficiency?

    Read about how the DuPont analysis model measures and studies a company's operating efficiency, and why net profit margin ... Read Answer >>
  5. What is the equity multiplier's affect on Return on Equity (ROE)?

    Learn about how to calculate the equity multiplier in the three-step DuPont analysis method, and see what impact a higher ... Read Answer >>
  6. How does DuPont Analysis measure financial leverage?

    Learn about how DuPont analysis measures financial leverage using the equity multiplier, and see when the equity multiplier ... Read Answer >>
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