DuPont Analysis Calculator
We have prepared this DuPont analysis calculator to help you understand the relationship between the ROE (return on equity) and its components. The DuPont analysis involves breaking down the ROE and understanding what contributes to it.
With this calculator, we have also written this article to help you understand what DuPont analysis is and how to calculate it using the DuPont equation. Moreover, we have also prepared some DuPont analysis examples to assist you in grasping the concept.
What is DuPont analysis? – The DuPont Model
DuPont's analysis formula, also known as the DuPont framework or DuPont equation, is a useful investing technique to analyze a company's competitiveness. It allows you to decompose a company's return on equity (ROE) into several powerful financial ratios to help you understand the company's underlying strengths. The ratios include:
The DuPont analysis formula allows you to break down a company's ROE into three components: profitability, operational efficiency, and financial leverage. This allows you to understand how the company generates value for its shareholders.
Read on to see the equation our DuPont ROE calculator is based on.
How to work with the DuPont framework? – DuPont analysis calculator
Without further ado, let's look at a DuPont analysis example.
You can find the main DuPont formula below:
ROE = NPM * TAT * FL
ROE– Return on equity;
NPM– Net profit margin;
TAT– Total asset turnover; and
FL– Financial leverage.
DuPont analysis, or the ROE DuPont formula, can be seen as a formula and a relationship between ROE and its components. Now, let's take a deep dive into the DuPont Analysis.
The DuPont analysis calculator allows us to understand the relationship between four important financial ratios, namely:
These ratios can be calculated using 4 inputs:
Here are some DuPont analysis examples:
- Calculate the return on equity (ROE).
The relationship of
ROEcan be demonstrated using DuPont formula:
ROE = NPM * TAT * FL,
NPM = net profit / revenue
TAT = revenue / total assets
FL = total assets / total shareholder's equity
ROEcan also be calculated as:
ROE = net income / total equity
ROEis defined as net income over common shareholders' equity. It represents the value the company can create for its shareholders.
- Calculate net profit margin.
The relationship of
NPMwithin the DuPont analysis is shown below:
NPM = ROE / (TAT * FL)
NPMcan also be calculated as:
NPM = net income / sales
NPMis one of the components of
ROEin DuPont analysis. A high
NPMindicates that the company is generating value based on its profitability.
- Calculate total asset turnover.
The relationship of
TATwithin the DuPont analysis is shown below:
TAT = ROE / (NPM * FL)
TATcan also be calculated as:
TAT = sales / total assets
TATis another component of
ROEin DuPont analysis. As
TATmeasures the company's operational efficiency, a high
TATmeans that the company is generating value by being more efficient than its peers.
- Calculate financial leverage.
Finally, the relationship of
FLwithin the DuPont analysis is shown below:
FL = ROE / (NPM * TAT)
FLcan also be calculated as:
FL = total assets / total equity
FLis the last component of
ROEin DuPont analysis.
FLmeasures how much assets are financed by liabilities rather than equity. A high
FLnaturally means that the company is generating value by taking on higher risks.
As you can see, the DuPont identity formula we use in the DuPont ROE calculator can be used in a variety of ways, providing useful information.
Dupont formula: How to interpret the DuPont analysis calculation?
Since we have understood what DuPont analysis is and the DuPont framework, now it is time to talk about how to interpret the DuPont model.
DuPont's analysis calculation is one of the best ways to understand and analyze the company's competitiveness in the industry. DuPont analysis allows you to break down ROE into the net profit margin, total asset turnover, and financial leverage. It allows you to analyze three scenarios:
- According to the DuPont model, if the ROE is driven by a high net profit margin, it means that the return is driven mainly through profitability.
- If the ROE is driven by high total asset turnover, it indicates that the company is high in operational efficiency. Hence, it allows the company to save more costs.
- If the ROE is driven by high financial leverage, the company is acquiring a higher return on equity by taking on more debt and risks. The DuPont framework states that a high ROE driven by high financial leverage might not be sustainable.
What is ROE?
Return on equity, or ROE for short, is the net income over the shareholders' equity. Since net income is the value the company generates and shareholders' equity is the money invested in the company, the metric assesses the company's ability to create value for the money its shareholders invest.
What is a good ROE?
In general, the higher the ROE the better, as it means that the company is able to generate higher return per equity capital. However, since ROE can be inflated by using higher leverage, it is thus critical to make sure that a high ROE figure is not mainly supported by high leverage.
What is net profit margin?
Net profit margin is defined as the net profit divided by the revenue. It measures the proportion of revenue the company retains as the net income. The higher the net profit margin, the more profitable the company.
What is total asset turnover?
Total asset turnover is defined as revenue over the total asset. It measures the operational effectiveness of a company. The higher the figure, the more efficient the company, as it means that the company is able to generate more revenue using the same number of assets.