Dupont Analysis : Examples and know how

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Dupont Analysis for stocks

We will study all there is to know about Dupont Analysis today.

Dupont Analysis, also known as DuPont Identity or DuPont Model, is a financial analysis method used to assess a company’s return on equity (ROE). It breaks down ROE into three key components:

Steps to do Dupont analysis :

1 : This component represents the company’s ability to generate profit from its sales.

It is calculated as: NPM = Net Income / Total Revenue

2. Asset Turnover (AT): Asset turnover measures how efficiently a company uses its assets to generate sales. It is calculated as:

AT = Total Revenue / Average Total Assets

3. Financial Leverage (FL): Financial leverage assesses how much the company relies on debt to finance its operations.

It is calculated as: FL = Average Total Assets / Average Shareholders' Equity

The formula for calculating Return on Equity (ROE) using the DuPont Analysis is:

ROE = NPM x AT x FL

Dupont Analysis Example :

Let’s use Visa as an example using Sep22 numbers, everything in millions:

Dupont Analysis with formula and examples
Dupont Analysis Visa Example

1. Net Profit Margin (NPM): Visa’s Net Income (for a specific period) = $14,957

Total Revenue (for the same period) = $29,310 NPM = $14,957 / $29,310 = 0.5103 or 51.03%

2. Asset Turnover (AT): To calculate Asset Turnover, you need information about the average total assets over the period. For simplicity, let’s assume Average Total Assets = $84,198 million. AT = $29,310 / $84,198 million = 0.348 or 34.8%

3. Financial Leverage (FL): To calculate Financial Leverage, you need information about the average shareholders’ equity over the period. Average Shareholders’ Equity = $36,585 million. FL = $84,198 / $36,585 = 2.3 or 230%

Now, we can calculate Visa’s ROE using the DuPont Analysis: ROE = NPM x AT x FL ROE = 51.03% x 34.8% x 230% ROE ≈ 40.84% Visa’s ROE, based on this DuPont Analysis, is approximately 40.84%.

This breakdown provides a deeper understanding of what is driving Visa’s return on equity. In this case, it suggests that Visa’s high ROE is influenced by its strong Net Profit Margin, efficient Asset Turnover, and a relatively high degree of Financial Leverage.