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Dupontanalysis

In: Business and Management

Submitted By abhisekbsr
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DuPont Analysis

DuPont analysis helps in identifying the source of profitability. The DuPont analysis breaks up ROA into 2 components:
ROA = Asset turnover*Operating profit margin

Taking ROA as (EBIT-Tax)/assets and multiplying and dividing by sales, we get (sales/assets)*((EBIT-Tax/sales))
Similarly it breaks up ROE into 3 components:
ROE = Net profit margin* Asset Turnover * Equity multiplier
This can also be written as:
ROE = Profitability*Efficiency*Leverage
The Three-Step DuPont Calculation:
Taking the ROE equation:
ROE = net income / shareholder's equity and multiplying the equation by (sales / sales) we get:
ROE = (net income / sales) * (sales / shareholder's equity)
We now have ROE broken into two components, the first is net profit margin, and the second is the equity turnover ratio. Now by multiplying in (assets / assets), we end up with the three-step DuPont identity:
ROE = (net income / sales) * (sales / assets) * (assets / shareholder's equity)
This equation for ROE breaks it into three widely used and studied components:
ROE = (Net profit margin)* (Asset Turnover) * (Equity multiplier) Return on Total Asset Analysis | Company | March'15 | March'14 | March'13 | March'12 | March'11 | Bharti Airtel | 2.74 | 1.62 | 1.44 | 2.81 | 1.54 | Reliance Communications | 0.79 | 1.16 | 0.74 | 0.99 | 1.44 | Idea Cellular | 5.97 | 4.75 | 2.93 | 2.30 | 3.35 |

Return on Equity Analysis | Company | March'15 | March'14 | March'13 | March'12 | March'11 | Bharti Airtel | 8.52 | 5.04 | 4.51 | 8.57 | | Reliance Communications | 2.03 | 3.16 | 1.92 | 2.42 | 3.21 | Idea Cellular | 16.15 | 12.77 | 7.39 | 5.70 | 7.59 |

ROE is a basic test of how effectively a company's management uses investors' money - ROE shows whether management is growing the company's value at an acceptable rate. ROA reveals how much profit a company…...

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