Question

What is the DuPont method?

Why is this important to our analysis of our company using ratios? Have you ever used DuPont analysis?

Answer 1

• 1.DuPont method
• Its a financial ratio based on ROE ratio ( Return On Equity).
• It helps to analyse the capacity of firm to increase its return to shareholders.
• Or,It breaks down return on equity ratio to ensure how they can increase their return for investors.
• This was invented in 1912 by Dupont salesman Donaldson Brown.
• Dupont corporation introduced this method or analysis in 1920s.

2.its importance to our analysis of our company using ratios:

• Dupont analysis looks in to 3 parts of ROE Ratio. They are,profit margin,Total asset turnover and financial leverage.
• Profit margin ratio shows that what percentage of sales are left over after all expenses are paid by the business.
• Total asset turn over ratio shows how efficiently a company can use its assets to generate sales.
• Financial leverage ratio shows the percentage of assets owned by the shareholders. Also shows how much of debt financing used to acquire assets and maintain operations.
• Thus,all the above three parts concludes that , a company can increase its return on equity by maintaining huge profit margin, raised asset turnover and leveraging assets more effectively.
• This analysis can be used to know how specific variables are affecting your use of shareholders equity and company's total profit level. Thus can understand how much profits are going towards repaying interest.
• Help to optimise companys financial management by raising sales or reducing expenses. Thus if you find out that a relatively big amount of companys revenue takes for repaying interest,then might try to refinance your companys business loan.
• It helps to improve factors where your company could improve efficiency to impress investors.
• It tells whether the margin is raised or company is making better use of assets or both.
• ROE = profit margin * total asset turn over * financial leverage.
• If investors are unsatisfied with low return,then this formula is used to pinpoint the problem area whether there is low profit margin , asset turn over or poor financial leveraging.
• Possible to compare operational efficiency of two similar firms.
• Managers can use this analysis to know strengths and weakness of their company.
• Thus by this analysis,investors and analyst can dig into why return on equity is high or low or what drives changes in ROE.

3.have you ever used dupont analysis?

• no,but i think its expensive one.and may chance to manipulation of data.
• Eventhough,its a good method for impressing shareholders.
• Helps for better profitability of company.
• thus its a starting point to know the strengths and weakness of our company.
• Its good to use.
• when ROE is higher ,its better and vice versa.
• Thus its a best choice for our company.

​​​​​​​Hope you understand.