Du Pont analysis is a framework developed in 1919 by E.I. du Pont de Nemours to evaluate a company's financial and operational performance. It breaks down return on equity into three components: net profit margin, asset turnover, and equity multiplier. This allows managers and investors to identify factors driving changes in ROE and determine strengths and weaknesses. While it provides useful insights, DuPont analysis has limitations such as not considering the time value of money or accounting differences between companies. Overall, it is a popular tool but does not replace a full financial statement analysis.

1. DU PONT ANALYSIS
Name – Bivabasu Kundu

2. Introduction
■ Du Pont model is a framework to evaluate the financial & operational
performance of a company and to serve as a financial reporting tool for the
investors to facilitate his decisions
■ Model was developed by E.I. du Pont de Nemours in 1919
■ Used by managers to address and overlook the strengths and weakness of
the company
■ Used to analyze a company's ability to increase its return on equity [ROE]
and offers an insight of the ways the company can increase their return for
investors
■ Interpreted into 3 alternatives - Two-step DuPont decomposition, Three-step
DuPont decomposition & Five-step DuPont decomposition

3. ROL
■ The Du Pont system of financial analysis is based on the return
on equity [ROE]; with the components of this ratio being the
net profit margin, the total assets turnover ratio and the equity
multiplier. - (McGowan and Staumbagh, 2012)
■ Profitability, assets, liabilities and equities are significant ways
of evaluating performance reports of a particular company for
making investment decisions. – (Blessing and Onoja, 2015)
■ DuPont analysis cited as an important financial tool provides the
investors with more comprehensive measure of both financial&
operational performance. – (Demmer, 2015)

4. Objectives / Hypothesis
Objectives –
a) To understand the significance of application of DuPont analysis
b) To study the overall performance of a particular company
c) To study the reasons of the change in ROE over time
Hypothesis –
a) Financial figures are susceptible to manipulation and may change
due to impact of external environment such as foreign exchange
rate
b) Eliminates tax measurement

5. Scope of DuPont
■ Evaluates the financial health of a company by determining the leverage of
debt & equity required
■ Determines the operational (profitability) efficiency and facilitates financial
(leverage) decisions
■ Helps to determine the need for dividend payments and retention of earnings
■ Breaks down ROE into 3 parts –
ROE
Net Profit
Margin
Equity
Multiplier
Asset
Turnover

6. Significance of DuPont
■ Impacts the cashflows indicating the measure of liquidity a
company possess
■ Indicates the level of debt financing -: High Multiplier : High
Leverage / Low Multiplier : High Equity
■ Helps to determine why the company’s ROE changes over
time.
■ Evaluates the amount of revenue generated on per asset
invested
■ Helps to determine the source of increase or decrease in the
incomes & expenditures

7. Comparative
Case Study of
tire Co.
 Net profit margin – Increase in
expenditure of Goodyear /
Increase in revenue of Michelin
:- Indicates higher operational
efficiency of Michelin
 Asset Turnover – Reduction in
total assets of Goodyear /
Increase in sales & revenue of
Michelin :- Indicates effective
generation of revenue on
assets for Goodyear
 Financial Leverage – Higher
debt of Goodyear / Lower debt
of Michelin :- Indicates debt
financing being undertaken by

8. Drawbacks of DuPont
■ Time value of money is not considered thereby returns may be inflated
■ Depends on the accuracy of inputs & thereby may not assure the correct
interpretation of financial assessments
■ Does not consider accrual transactions which is contradictory to accounting
principles
■ Different accounting practices adopted by the companies also make
comparison difficult
■ Financial figures are often vulnerable to manipulation

9. Conclusion
■ Despite Its several drawbacks, DuPont is one of the popular
framework to assess & evaluate the overall [Financial +
Operational] efficiency of a particular company. However, it
does not take provisions into account as DuPont techniques are
highly dependent on the cashflow of the entity. The metrics
used in DuPont does provide both the managers & investors an
insight behind change in their ROE and analyse the strength
and weakness of that company.

10. Thank You