FACULTY OF BUSINESS

PROFESSIONAL SCHOOL OF ACCOUNTING

Academic report
Dupont Analysis

Course
Finance Analysis for Decision - Making

Author
Castro Carbajal Indira Judith

Teacher
Campos Valles, Walter Orlando

MOYOBAMBA – PERU
2024
 INDEX

I. INTRODUCTION.....................................................................................................3
II. DEVELOPMENT.....................................................................................................6
III. CONCLUSIONS......................................................................................................9
IV. REFERENCES......................................................................................................10
I. INTRODUCTION

The Du Pont model consists of a formula-diagram that allows

you to easily see the decomposition of the return on assets and the
return on capital into its different stages or elements; Furthermore, it
shows the relationship between these elements and the economic
variables that affect them.

This approach is not about discovering the black thread in

the fabric, but rather reaching an almost invisible or imperceptible
issue such as the result that arises after analyzing and modifying the
financial variables.

A financial analysis such as the Du Pont analysis 3 allows

each factor to be compared and dismembered in a more digestible
way; managing to develop and maximize the goal of every
shareholder: positioning themselves in the market and maximizing the
profits of both the company and the shareholders. (Ochoa, 2019)

Works such as the one we are dealing with today are

validated by their relevance by providing tools that complement the
need for business training and the linking of the educational system
through the interrelation of knowledge and experience, that is,
combining both the quantitative and qualitative aspects that affect
take decisions.

During the second period of the last century, there was a

period of great economic expansion at an unprecedented rate, the
product of a favorable situation caused by the arrival of money from
abroad and a growing demand that stimulated investment
( Comellas , 2019). This fosters the need for development and basic
principles of Administrative finance.

The 1920s were characterized by its accelerated industrial

development in the United States of America; causing advances of all
kinds, from science to forms of entertainment in general.
 Economic development generated a speculative bubble and
in the mid-1920s the stock market in the United States experienced
rapid expansion until the great fall in stock prices in October 1929, a
crash that contributed to the great depression ten years and most
serious ever experienced by the industrialized Western world.
Although it originated in the United States, this phenomenon caused
drastic declines in production, severe unemployment, and acute
deflation in almost all countries in the world (Encyclopedia Britanica ,
2019). The Du Pont model is created by Donaldson Brown5
( Catanese , 1997). Showing his financial acumen in 1912, when he
presented a report of the company's efficiency to the Executive
Committee using a return on investment formula. Seeing its
effectiveness, Mr. John J. Raskob6 took Brown on board and
encouraged him to develop uniform accounting procedures and other
standard statistical formulas that allowed division managers to
evaluate performance throughout the company despite the great
diversification of the 1990s. 1910.

In 1918 Brown executed Du Pont's heavy investment in

General Motors Company (GMC), taking over the treasurer's office,
attracting economists and statisticians, an exceptional practice at the
time.

In 1921 Du Pont had acquired a controlling interest in the

General Motors Corporation banner , bringing Brown to the position
of vice president of finance within the firm. Brown helped bring about
the company's financial recovery and in 1923 developed the
mechanisms that allowed Du Pont to retain GMC's investment by
perfecting the cost accounting techniques he had been developing at
Du Pont (Dupont, 2019).

The principles of return on investment, return on equity,

forecasting, and flexible budgeting were later widely adopted
throughout American businesses. It is in this framework that
Donaldson Brown (financial director of Du Pont and General Motors
Corporation ) developed the equation as a way to measure the
performance and profitability of the company through the return on
investment (Mercado, 2011) considering Brown as an innovator in
the field, builder of many of Du Pont's basic financial controls.

At that time he was the most versed man in the United States
in the development and use of these new administrative tools. Their
achievements were an example of the application of information and
statistical procedures in the administration of complex companies
(Chandler, 2019).

The Dupont analysis system was developed by the Du Pont

de Nemours company a good number of years ago and tries to
explain obtaining the profitability of an investment based on two
factors:

1.- Rotation of assets.

2.- Percentage of global profit or margin on sales.
One of the first numerical models used for management
control was that of the Dupont de Nemours company, which
according to Loreno dates back to 1907. In this regard, the same
author says: “It was in 1907 when Donalson Brown invented the
formula that relates the index of return on equity (ROI), the operating
profitability ratio, and the capital turnover ratio. In this way, the
integrated building was constituted: general accounting - analytical
accounting - operations control through costs - inventory control
through profitability.
II. DEVELOPMENT

II.1 Profit margin on sales

There are products that do not have a high turnover, that only
sell one a week or even a month. Companies that sell these
types of products depend largely on the profit margin they
have left for each sale. Managing a good profit margin allows
them to be profitable without selling a large number of units.
Companies that use this system, although they may have
good profitability, are not using their assets or working capital
efficiently, since they must have capital tied up for a longer
period of time.

II.2 Efficient use of your fixed assets

The opposite case to the previous one occurs when a
company has a lower margin in profit over the sales price, but
that is compensated by the high turnover of its products
(Efficient use of its assets). A product that only has a 5% profit
but has a daily turnover is much more profitable than a product
that has a 20% profit margin but has a turnover of a week or
more.

In a practical example and assuming the re-immersion of

profits, the product with a margin of 5% but that has a daily
rotation, in one week (5 days) its profitability will be 27.63%,
(25% if they are not reinvested profits), while a product that
has a profit margin of 20% but with weekly rotation, in one
week its profitability will only be 20%. The above means that
profitability is not always in selling at a higher price but rather
in selling a greater quantity at a lower price.

II.3 Capital multiplier

 It corresponds to what is also called financial appeasement,
which consists of the possibility of financing investments
without the need to have one's own resources. In order to
operate, the company requires assets, which can only be
financed in two ways; firstly, for contributions from partners
(Equity) and secondly, credits with third parties (Liabilities).
Thus, the greater the financed capital, the greater the financial
costs for this capital, which directly affects the profitability
generated by the assets.

That is why the DUPONT system includes financial leverage

(capital multiplier) to determine the profitability of the company,
since every asset financed with liabilities involves a financial
cost that directly affects the profitability generated by the profit
margin on sales and/or or by the efficiency in the operation of
the assets, the other two variables considered by the
DUPONT system

II.4 Return on equity

The ROE, for its acronym in English “ Return on Equity ”, and
whose translation into Spanish is financial profitability, is an
indicator that serves to measure both the profitability of a
company and the relationship between net profit and the figure
of equity.

In other words, ROE measures a company's ability to provide

remuneration to an investor based on the capital they invest.
In this way, he himself can decide whether or not to make the
investment, whether to increase it or maintain it.

This indicator is very valuable for companies, since it allows

them to know if the desired performance is being obtained or
if, on the contrary, changes and adjustments must be made to
achieve better profitability.

II.5 Profitability and use of assets

 Within the Dupont Model, the effect of the financial structure
can be considered, that is, the combination of Liabilities and
Capital to measure profitability only for the part contributed by
the owners, better known as Return on Equity (ROE).

II.6 Dupont model and the capital amplification factor

III. CONCLUSIONS

The Du Pont formula proposes a series of very important financial

ratios to measure the efficiency of the company in areas such as
sales, by allowing, through financial forecasts, to monitor and control
that they are achieved in accordance with the plans that were drawn
up at the beginning. of the year. On the other hand, it allows you to
evaluate with what degree of control or efficiency costs and
expenses are being applied to generate sales, since the fact of
selling a lot does not mean that you are more efficient. All these
factors contribute directly to the company's profit.

It also allows us to monitor the degree to which the company's assets

are being used to generate income, since normally investments
made in inventories, computer equipment, machinery, transportation
equipment, etc., are used to generate income. sales, so it is
important not to have idle investments or with assets that are being
used with a lower capacity than what they can offer.

It is important to control investments made in long-lived assets, since

most of the time liabilities are incurred to finance these operations,
such as: credits to suppliers, bank loans, leases, lease backs,
leasing, etc., for example. which generates a financial burden,
directly impacting the profit for the year and therefore the Financial
Leverage Margin.

Through the Income Statement and the Statement of Financial

Situation, the relative data for the preparation of the Du Pont Formula
is obtained. Once the operations have been carried out to obtain the
financial ratios, it is important that they be evaluated jointly with other
financial tools such as sensitivity analysis, the use of the SWOT
matrix.
IV. REFERENCES

- Valdés Medina, FE, Martínez Contreras, MT, & Beltrán Enríquez,

JA (2020). Application of the DUPONT method in the analysis of
profitability drivers: CEMEX case 2005-2019. Latin American
research journal on Organizational competitiveness , (November).

- Hutasoit , Y.R., Siahaan , Y., Putri , DE, & Grace, E. (2019). Du

Pont System Analysis dalam Mengukur Kinerja Keuangan
Perusahaan Pada PT Fast Food Indonesia, Tbk Yang Terdaftar Di
Bursa Efek Indonesia. Financial : Jurnal Akuntansi , 5 (2), 40-49.

- Krisnaryatko , N., & Kristianti , I. (2019). Analysis Kinerja

Keuangan Perusahaan dengan Du Pont System . Jurnal
Akuntansi Keuangan dan Bisnis , 12 (2), 77-86.

- Cendón Sosa, FJ, & Zúñiga Cabrera, CE (2021). Analysis of the

return on equity of Ecuadorian cooperatives in segment 1 period
2016-2019, Dupont System ( Bachelor's thesis , University of
Azuay).