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  • Dupont Analysis: A Financial Analysis Tool

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    This document outlines the DuPont analysis method for evaluating a company's financial performance. It describes five key financial ratios - Profit Margin, Total Asset Turnover, Equity Multiplier, Return on Investment, and Return on Equity - and how they are calculated. A firm has a strong Return on Equity if it has strong operating management resulting in high Profit Margin, strong asset management resulting in high Total Asset Turnover, and a strong capital structure with an appropriately low Equity Multiplier.

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    Lecture4DUPONTANALYSIS

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    This document outlines the DuPont analysis method for evaluating a company's financial performance. It describes five key financial ratios - Profit Margin, Total Asset Turnover, Equity Multiplier, Return on Investment, and Return on Equity - and how they are calculated. A firm has a strong Return on Equity if it has strong operating management resulting in high Profit Margin, strong asset management resulting in high Total Asset Turnover, and a strong capital structure with an appropriately low Equity Multiplier.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
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    15 views3 pages

    Dupont Analysis: A Financial Analysis Tool

    Uploaded by

    sachin_choudhary_5
    This document outlines the DuPont analysis method for evaluating a company's financial performance. It describes five key financial ratios - Profit Margin, Total Asset Turnover, Equity Multiplier, Return on Investment, and Return on Equity - and how they are calculated. A firm has a strong Return on Equity if it has strong operating management resulting in high Profit Margin, strong asset management resulting in high Total Asset Turnover, and a strong capital structure with an appropriately low Equity Multiplier.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    DUPONT ANALYSIS

    A Financial Analysis Tool

    DUPONT ANALYSIS
    To Be Successful, a business must manage its:
    Operating Profits Level of Assets Amount of Debt

    FIVE KEY FINANCIAL RATIOS


    Profit Margin (PM) Total Asset Turnover (TAT) Equity Multiplier (EM) Return on Investment (ROI) Return on Equity (ROE)

    PROFIT MARGIN (PM)


    Profit Margin (PM) = Net Income / Sales or TR Positive if: Positive and Rising Over Time

    TOTAL ASSET TURNOVER (TAT)


    Total Asset Turnover (TAT) = Sales (or Total Revenue) / Total Assets Positive if: Rising Over Time Varies by Industry (Need Industry Average) Most Manufacturing Firms at 1X to 2X

    EQUITY MULTIPLIER (EM)


    Equity Multiplier (EM) = Total Assets / Total Equity Positive if: Does not rise over time Is between 2X or 3X Is less than 3X

    RETURN ON INVESTMENT (ROI)


    Return on Investment (ROI) = PM x TAT OR ROI = Net Income / Total Assets

    RETURN ON EQUITY (ROE)


    Return on Equity (ROE) = PM x TAT x EM = ROI x EM = Net Income / Total Equity Positive if: High for Right Reasons (High ROI, PM, TAT) Not from High EM

    SUMMARY OF DUPONT FORMULA


    Firm Has Strong ROE If:
    Strong Operating Management (High PM) Strong Asset Management (High TAT) Strong Capital Structure (Appropriately low EM)

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