Dupont Analysis

Dupont Analysis

The DuPont Analysis or known as dupont identity, Dupont equation, Dupont model or dupont method is one method use to analysis the company by dividing the ROE or Return On Equity into three parts. This formula was first used by DuPont Corporation in 1920s. Dupont Analysis focused to operating management, management of assets and the capital sructure of a company this three point is a critical elements of financial  condition  of a company.

One indicator of  a successful company is from ROE or Return On Equity, because by using the ROE indicator the investor can know what the return is on position of the company that belongs to equity. That means It is a simple calculation that quickly summarizes the ability of management to turn shareholder equity into profitable returns. Using the Dupont analysis investor or the management of company can know the interrelationship between key financial ratios. It can be presented in :

Basic formula is :

·         Return on equity (ROE) = net income / total equity

If we want multiply ROE by Sales, the formula is :

·         Return on equity = (net income / sales) * (sales / total equity)

·         => Return On Equity = net profit margin * return on equity

Another formula is :

·         Return on equity (ROE) = net income / total equity

If we multiply ROE by assets we get :

·         ROE = (net income / sales) * (sales / assets) * (assets / equity)

·         => ROE = net profit margin * assets turnover * equality multiplier

The Dupont formula can be expanded further  to giving the analyst more information

Example :

·         ROE = (net income / sales) * (sales / assets) * (assets / equity)

If in a third instance we substituted net income for EBT * (1-tax rate), we get:

ROE =(EBT/sales) * (sales / assets) * (assets / equity)* (1-tax rate)

Sumber :

Return on Equity and the Dupont System – CFA Level 1 _ Investopedia.htm

DuPont analysis - Wikipedia, the free encyclopedia.htm#Basic_formulae

DuPont Analysis (example) Part 2

Since we already have the data, now we can analysis for each company using Dupont three part analysis.

Perusahaan A	2011	2010	2009
ROE	0.2749	0.4232	0.3015
Tax burden	0.7494	0.8291	0.7628
Interest burden	1.0659	1.0365	1.0869
EBIT Margin	0.2306	0.3913	0.2656
Asset Turnover	0.6088	0.5777	0.6949
Leverage	2.4515	2.1790	1.9701
Perusahaan B	2011	2010	2009
ROE	0.3086	0.3283	0.4113
Tax burden	0.7293	0.7568	0.7360
Interest burden	0.9171	0.9880	1.0044
EBIT Margin	0.1448	0.1441	0.1861
Asset Turnover	0.9431	1.0711	1.1401
Leverage	3.3779	2.8445	2.6234
Perusahaan C	2011	2010	2009
ROE	0.0698	0.1205	0.2650
Tax burden	0.9248	0.6977	1.2875
Interest burden	0.4022	0.7919	0.6499
EBIT Margin	0.0431	0.0549	0.0610
Asset Turnover	1.5369	1.5009	1.8280
Leverage	2.8183	2.6459	2.8398

Now we already have the result of our calculation by using three point Dupont analysis. We can begin the analsysis by looking at four important part the ROE, EBIT, Asset Turnover, and Leverage.

ROE

 Perusahaan  A has strong ROE over 3 years. According  resul the range is between 27% - 42%, with the highgest result is in 2010 with 42.3 %. Perusahaan B’s ROE has range between 30% - 41%. Perusahaan C has a down trending ROE.  In 2009 it was strong at 26% (above the average).  In 2010 it matched the S&P 500 30 year average at around 12%.  Then in 2011 it fell well below the average to 7%.

EBIT

EBIT is one profit indicator for company so if investor want to know if company is profitabel they can see the EBIT value of company. If we compare the three company above we can see that perusahaan A has the strongest EBIT. Perusaaan B also have a strong in profit margin but they has also a drop in 2011. Perusahaan C is weakest of all three company, in 2011 the EbIT value is less than a third of perusahaan A.

Asset Turnover

Perusahaan A is the weakest of three company in this point but even with low asset turnover they still have a high value of EBIT so investor would still consider to looking into company. Perusahaan B has a fairly high asset turnover and quite consitent from year to year. Perusahaan C is the strongest in this point, their asset turnover is more than double of that perusahaan A and over 50% higher than perusahaan B. This make up for their low profit margin.

Leverage

Perusahaan A has the least amount of leverage of three company. This low amount leverage and high value of ROE mean that a good portion of return are coming from sales or because effective management.

Perusahaan B has the highest leverage this mean that perusahaan B will be more affected during a downturn but would gain more in bull run. And now, finally we see that perusahaan C for the size and profit margin, their leverage would be considered high. In one side this mean that perusahaan C not only face the possibility of being hit hard in a bad economy and that meaning they do not have brand power to keep the customer and in other side their leverage hasn’t significantly change.    

Source: How to use DuPont Analysis for Financial Analysis  Soft-Drink Example _ The Financial    Intern.htm (dengan penyesuaiaan)