Three Indicators of DuPont Analysis

DuPont Analysis, first used by DuPont, utilizes the relationship between several key financial ratios to comprehensively analyze a company's financial position so that it can evaluate its profitability and return on equity. One of the main indicators is the return on equity (ROE), but ROE alone is not very meaningful, we also need to study the three indicators of net sales margin, asset turnover and equity multiplier.

DuPont analysis of the three indicators

The following figure is a traditional DuPont analysis schematic diagram, which first breaks down the return on equity into net asset margin and equity multiplier, and then breaks down the net asset margin into net sales margin and total asset turnover.

1 Net Sales Margin: It is the net profit as a percentage of sales revenue, which reflects the amount of net profit brought in by each dollar of sales revenue, and indicates the level of return on sales revenue.

2 Asset Turnover: Total Asset Turnover is the ratio of the net business income to the average total assets of the enterprise in a certain period of time, it is an important indicator to comprehensively evaluate the operational quality and utilization efficiency of all the assets of the enterprise. When the turnover rate is greater, it also means that the total asset turnover is faster, reflecting the stronger sales capacity. However, enterprises can also accelerate the turnover of assets through thin profits and high sales.

3 Equity Multiplier: Literally, it can be understood that it represents how many times all the total assets available to the company are the owner's equity, which reflects the size of the financial leverage of the enterprise. In the balance sheet, assets = liabilities + owner's equity, when the equity multiplier is larger, it means that the shareholders invested capital in the assets of the smaller proportion, the greater the financial leverage, which will also take a greater risk.

Overall, in DuPont analysis, net sales margin, asset turnover and equity multiplier represent profitability, operating capacity, and liability capacity, respectively, and these three important indicators can help us analyze and compare business performance in depth.