DuPont Analysis

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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)

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. 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 >>
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    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
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