Introduction:
The DuPont system of financial ratio analysis is a framework developed by DuPont Corporation in the 1920s that breaks down a company’s Return on Equity (ROE) into multiple components to identify the factors driving profitability.
Thank you for reading this post, don't forget to subscribe!- It provides a detailed understanding of how operating efficiency, asset utilization, and financial leverage affect a company’s overall return to shareholders.
This provides a summary of firm`s profitability in terms of return of assets (ROA) and return on equity (ROE)
Purpose
- To analyze the key drivers of financial performance.
- To identify strengths and weaknesses in profitability, efficiency, and leverage.
- To provide management with insight for improving financial performance.
According to DuPont System
ROA = Profit Margin × Total Asset Turnover
ROE = Profit Margin × Total Asset Turnover × Equity Multiplier