Du Pont Analysis

Introduction

DuPont Analysis or the DuPont model is an expression which breaks Return on Equity into three or
five parts. The name comes from the DuPont Corporation that started using this formula in the
1920s. DuPont explosives salesman Donaldson Brown invented this formula in an internal efficiency
report.

Features

1) This analysis enables the analyst to understand the source of superior (or inferior) return by
comparison with companies in similar industries (or between industries).
2) The model is less useful for industries such as investment banking, in which the underlying
elements are not meaningful.
3) The Du Pont model allows analysts to determine which of the elements is dominant in any
change of ROE

The DuPont Model

3 step Model =

Also can be written as; (Profit margin) x (Asset turnover) x (Equity multiplier)

1. Net income/Sales = measures profitability or the profit margin.

2. Sales/Assets = measures operating efficiency or the asset turn over
3. Assets/Equity = measures financial leverage or equity multiplier.

Extra Information:

Thereafter, Net income/ Sales is further decomposed in the 5 step model.

5 step Model =

Also can be written as; ROE = Tax burden x Interest burden x Margin x Turnover x Leverage