DuPont Analysis Model

Financial Management Objectives, Liquidity, Profitability, Return on Assets, DuPont Analysis Model, Return On Investment

آخر تحديث: مايو 19, 2022

DuPont Analysis Model for Financial Analysis

The Dupont Analysis model for financial analysis, which is a model named after the company that developed it, the American company DuPont. The idea of ​​this model, which has gained wide fame, as an effective tool in analyzing and controlling financial performance and knowing sales profitability and productivity assets. This model has gained fame due to its effective help in tracking the revenue-power factors in both the income statement and the balance sheet.

DuPont Analysis model simply explains that the return on assets is determined by the profitability of sales (profit margin) and the ability of assets to achieve sales (turnover rate). It also shows how these two components work together to affect the return on assets (or revenue power) of the organization.

DuPont Analysis model also helps in tracking the factors affecting each of the profit margin and turnover rate.

The model shows that the return on assets is determined by the profitability of sales and by the ability of assets to achieve sales, as shown by the following equation:

Return on Assets = (Net Profit ÷ Sales) x (Sales ÷ Assets)

Means of improving Return on Assets

If we look at the first and second Return on Assets equations:

Return on Assets = Profit Margin ÷ Turnover Rate

And:

Return on Assets = (Net operating profit before interest and tax ÷ Sales) x (Sales ÷ Net operating assets)

We find that the improvement of Return on Assets may be done through the following means:

  1. Profit Margin Improvement with Stable Turnover Rate
  2. Improving Turnover Rate while maintaining a stable Profit Margin
  3. Improved Profit Margin and Turnover Rate
  4. Changes on both in two opposite directions, with the predominance of a positive change in the relative importance of the change.

It is also possible to improve both the turnover rate and the profit margin through a change in the numerator or denominator or in both, as follows:

1. Profit Margin Improvement

This end can be achieved through:

  1. Increased sales by a percentage greater than the increase in total cost of sales and operating expenses.
  2. Decline in sales and a decrease in total sales costs and operating expenses by a greater percentage than the reduction in sales.
  3. Sales stability with lower total sales costs.
  4. Increased sales with lower total sales costs.

2. Turnover Rate Improvement

The turnover rate can be improved by achieving a change in the numerator and denominator of the turnover ratio in the same directions indicated in improving the profit margin, which are:

  1. Increased sales by a greater percentage than the increase in operating assets.
  2. Reducing sales by less than reducing working assets.
  3. Increased sales with stable working assets.
  4. Sales stability with reduced operating assets.

DuPont Analysis Model Example 1

The accounts of ABC Company showed the following figures:

First yearSecond yearChange %
Sales3000042000+40%
Cost of sales(20000)(28000)+40%
General and administrative expenses(2500)(3080)+23%
Net operating profit750010920+45.6%
Operating assets2000020000
Figures of ABC Company – DuPont Analysis Model Example 1

Required: Calculate the return on assets and indicate the reasons that led to its change.

Solution

First yearSecond yearChange %
Profit Margin7500/30000 = 25%10920/42000 = 26%40%
Turnover Rate30000/20000 = 1.5 or 150%42000/20000 = 2.1 or 210%40%
Return on Assets25% * 1.5 = 37.5%26% * 2.1 = 54.6%45.6%
DuPont Analysis Model Calculations

It is noted from the previous table that the profit margin and turnover rate improved, and then the Return on Assets improved.

The reasons for the improvement are that sales increased by 40%, which is more than the 23% increase in general and administrative expenses.

DuPont Analysis Model Example 2

The results of a company X showed the following figures:

First yearSecond yearChange %
Sales3000027000-10%
Cost of sales(20000)(18000)-10%
General and administrative expenses(2500)(1710)-31.6%
Net operating profit75007290-2.8%
Operating assets2000020000
Figures of ABC Company – DuPont Analysis Model Example 2

Required: Calculate the return on assets (or revenue power) and indicate the reasons that led to its change.

Solution

First yearSecond yearChange %
Profit Margin7500/30000 = 25%7290/27000= 27%+8%
Turnover Rate30000/20000 = 1.5 or 150%27000/20000 = 1.35 or 135%-10%
Return on Assets25% * 1.5 = 37.5%27% * 1.35 = 36.45%-2.8%
DuPont Analysis Model Calculations

It is noted from the previous table that the profit margin increased by 8%, the turnover rate decreased by 10%, and the Return on Assets decreased by 2.8%.

The reasons for this is the fact that the effect of the decrease in the turnover rate is greater than the effect of the increase in the profit margin, which led to a decrease in the Return on Assets.

References

  • Financial Management Encyclopedia, Multi Disciplines Research and Studies Center, 2022
Financial Management Objectives, DuPont Analysis Model for Financial Analysis
DuPont Analysis Model for Financial Analysis