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DuPont analysis

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Introduction to DuPont analysis
also known as DuPont financial analysis system, referred to as DuPont system, is a method of comprehensive and systematic analysis and evaluation of enterprise financial status and economic benefits by using the internal relationship between the main financial ratio indicators. The system takes the return on net assets as the leader, takes the net asset interest rate and equity multiplier as the core, and focuses on revealing the impact of enterprise capability and equity multiplier on the return on net assets, as well as the interaction relationship between relevant indicators
it is named because it was first successfully applied by DuPont
the relationship between several main financial indicators in DuPont analysis method is:
return on net assets = net interest rate of assets × Equity multiplier
and: net interest rate of assets = net interest rate of sales × Asset turnover rate
i.e. return on net assets = net interest rate on sales × Asset turnover × The equity multiplier
DuPont analysis method helps the enterprise management to see more clearly the determinants of the return on equity capital and the correlation between the net profit margin on sales, the total asset turnover rate and the debt ratio, and provides the management with a clear road map to investigate the efficiency of the company’s asset management and whether to maximize the return on shareholders’ investment
from the perspective of enterprise performance evaluation, DuPont analysis method only includes financial information and can not fully reflect the strength of the enterprise. It has great limitations. It needs to be paid attention to in practical application and must be analyzed in combination with other information of the enterprise. It is mainly reflected in:
1. Paying too much attention to short-term financial results may encourage the short-term behavior of the company’s management and ignore the long-term value creation of the enterprise
2. Financial indicators reflect the past business performance of enterprises and measure that enterprises in the industrial era can meet the requirements. However, in the information age, customers, suppliers, employees, technological innovation and other factors have a greater and greater impact on the business performance of enterprises, and DuPont analysis is powerless in these aspects
3. In the market environment, the intangible knowledge assets of enterprises are very important to improve the long-term competitiveness of enterprises, but DuPont analysis can not solve the valuation problem of intangible assets
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return on net assets = sales profit margin x total asset turnover x equity multiplier

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