DuPont analysis which is also known as the DuPont model or DuPont Identity is basically a framework that is used for the analysis of a fundamental financial performance of a company. It is a valuablemethod that is utilized for decomposing different drivers of a company’s return on equity (ROE). This, in turn, helps investorsfocusing on the key metrics of the company’s financial performance individually which helps them to identify the strengths and weaknesses of that particular company. (Hargrave, 2019)
Basically, there are three main financial metrics that drive any company’s return on equity. These metrics arefinancial leverage, asset use efficiency and most importantly, itsoperating efficiency. The operating efficiency is best described by the net profit margin and thus this is used in the analysis as a representative of the operational efficiency. The asset use efficiencycan be best measured by the asset turnover ratio and so it is used as representative of asset use efficiency in the analysis. The leverage in this analysis is, however, measured by the equity multiplier, the formula of which is average total assets divided by average total shareholders’ equity.
The formula for the DuPont Analysis is as follows,
DuPont Analysis=Net Profit Margin×AT×EM
Where
Net Profit margin=Net income/revenue
Asset Turnover= Sales/Total Assets
Equity Multiplier = Average Total Assets/Average shareholders’ equity
DuPont Analysis (return on equity)
DuPont Analysis of Disney for 2019 is as follows,
| Net Profit margin | 39.61% | |
| Asset Turnover | 0.142 | |
| Equity Multiplier | 1.994 | |
| DuPont Analysis (return on equity) | =39.61%*0.142*0.112= | 11.22% |
The analysis shows that the main driver for the return on equity for Disney is the net profit margin.
Reference
Hargrave, M.(2019). DuPont Analysis. Retrieved from: https://www.investopedia.com/terms/d/dupontanalysis.asp