DuPont Analysis Formula: How to Calculate DuPont Analysis

DuPont analysis (also known as the DuPont equation or finding your DuPont identity) is a return on equity or ROE formula you can use to better understand your company’s asset efficiency, financial leverage, and net income margin.

It takes its name from the DuPont Corporation where the formula originated. In 1914, F. Donaldson Brown, one of the corporation’s financial executives, first defined the various equations necessary to do this sort of analysis. Since then, many different companies besides DuPont have made successful use of the same formulas.

DuPont analysis helps you better understand ways your current business model is struggling or succeeding to create a return on equity. DuPont analysis enables you to:

• Assess asset use efficiency. In addition to giving you an in-depth look at your company’s return on equity (ROE), DuPont analysis allows you to see how you’re performing in terms of return on assets (ROA). In particular, investors want to know how well your company utilizes the assets you have at present to generate profit.
• Define financial leverage. As you use the equity multiplier in your DuPont analysis, you’ll get a better sense of your company’s overall leverage. This financial ratio helps you determine the amount of debt you’ve taken on to fund initiatives as well as whether or not you’re putting this money to good use.
• Determine operating efficiency. By comparing your net income statement against your total revenue, you can glean insights into your business’s overall operating efficiency. This is one of the simplest metrics you can use to determine whether or not your company returns a substantial profit.
• Establish return on equity. The ultimate purpose of DuPont analysis is to use variables about asset use, financial leverage, and operating efficiency to better understand your return on equity as a whole. You can then use this ROE calculation to compare your business to similar companies and figure out how you can improve your own standing to increase profits or better entice additional investors.

Before performing a full DuPont analysis, you need to perform multiple smaller calculations first. Put these three formulas into practice to get the most out of your ultimate analysis:

1. 1. Asset turnover formula: To determine your company’s asset turnover ratio, divide your total revenue by your average total assets. The number of assets and amount of revenue you have—in particular, in relation to each other—depends in large part on your business model and type.
2. 2. Equity multiplier formula: This leverage ratio helps you better understand how much equity your company has. In this formula, divide your average assets by your shareholders’ equity to find out your financial leverage.
3. 3. Net profit margin formula: Your net profits refer to the amount of money you have left over from revenue after deducting the cost of goods and other relevant expenditures. To obtain your net profit margin, divide your bottom line net income by your total revenue.

There are two ways to perform a DuPont analysis: a three-step approach or a five-step model. The former provides a quicker, simpler formula with a little less thorough product; the latter takes more time up front but gives you more valuable data since it includes information about your tax burdens the three-step approach does not encompass. You can find everything you need to perform either type of analysis in your company’s financial statements.

In the three-step DuPont model, start by dividing revenue by average total assets. Then divide average assets by shareholders’ equity. Then divide net income by your total revenue. After you finish performing these calculations, multiply them together to determine your return on equity.

For the five-step approach, divide net income by gross income pretax. Then divide pretax income by EBIT (earnings before interest expenses and taxes). Then divide EBIT by revenue. Then divide revenue by average total assets. Then divide average total assets by average shareholders’ equity. Multiply these variables together to complete your DuPont analysis.

Suppose a retailer wants to complete a DuPont analysis to better understand their ROE ratio and gain insight into what might inform their overall valuation for investors.

Imagine this company has a total revenue of $1,000 and a net income of $100. When you divide the net income by the total revenue, you see you have a net profit margin of 10% or 0.1. Next, you see this company has $200 worth of assets for its $1,000 in revenue. You would divide 1000 by 200 to get an asset turnover ratio of 5. Finally, you see the company has an additional $200 in equity for its $200 in assets. After dividing 200 by 200, your financial leverage turns out to be 1.

To complete your DuPont analysis, multiply all these variables together: 0.1 x 5 x 1 = 0.5. As a result, 0.5, or 5%, is your return on equity.

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