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The Du Pont Identity (also known as Du Pont analysis or Dupont analysis) is an expression which breaks ROE (Return On Equity) into three parts. Return on Equity (ROE, Return on average common equity) measures the rate of return on the ownership interest (shareholders equity) of the common stock owners. ...
ROE = (Net profit / Sales) * (Sales / Assets) * (Assets / Equity) = (Profit margin) * (Asset turnover) * (Equity multiplier) The Du Pont identity breaks down Return on Equity (that is, the return to equity that investors have contributed to the firm) into three distinct elements. This analysis allows the analyst to understand where superior (or inferior) return is derived from by comparison with companies in similar industries (or between industries). Profit margin is a measure of profitability. ...
This article or section does not cite its references or sources. ...
Ä¥In finance, leverage (or gearing) is using given resources in such a way that the potential positive or negative outcome is magnified. ...
Net profit is an accounting term which is commonly used in business. ...
Sales, or the activity of selling, forms an integral part of commercial activity. ...
Sales, or the activity of selling, forms an integral part of commercial activity. ...
In business and accounting an asset is anything owned, whether in possession or by right to take possession, by a person or a group acting together, e. ...
In business and accounting an asset is anything owned, whether in possession or by right to take possession, by a person or a group acting together, e. ...
The Court of Chancery, London, early 19th century This article is about the concept of equity in the jurisprudence of common law countries. ...
The Du Pont identity is less useful for some industries, such as banking, that do not use certain of the concepts or for which the concepts are less meaningful. Variations may be used in certain industries, as long as they also respect the underlying structure of the Du Pont identity.
Du Pont analysis relies upon the accounting identity, that is, a statement (formula) that is by definition true. In mathematics, the term identity has several important uses: identity can refer to an equality that remains true regardless of the values of any variables that appear within it, to distinguish it from an equality which is true under more particular conditions. ...
Examples
High turnover industries Certain types of retail establishments, particularly grocery stores, may have very low profit margins on sales, and relatively moderate leverage. In contrast, though, groceries may have very high turnover, selling a significant multiple of their assets per year. The ROE of such firms may be particularly dependent on performance of this metric, and hence asset turnover may be studied extremely carefully for signs of under or over-performance. For example, same store sales of many retailers is considered important as an indication that the firm is deriving greater profits from existing stores (rather than showing improved performance by continually opening new stores). Same-store sales are a measure of how well a particular retail chain is doing revenue-wise versus the prior year. ...
High margin industries Other industries, such as fashion, may derive a substantial portion of their competitive advantage from selling at a higher margin, rather than higher sales. For high-end fashion brands, increasing sales without sacrificing margin may be critical. The Du Pont identity allows analysts to determine which of the elements is dominant in any change of ROE.
High leverage industries Some sectors, such as the financial sector, rely on high leverage to generate acceptable ROE. In contrast, however, many other industries would see high levels of leverage as unacceptably risky. Du Pont analysis allows the third party (relying primarily on the financial statements) to compare leverage with other financial elements that determine ROE between similar companies.
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