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.
- It provides a detailed understanding of how operating efficiency, asset utilization, and financial leverage affect a company’s overall return to shareholders.
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.
Traditional DuPont Model (Two-Step Model)
The traditional DuPont analysis expresses ROE as the product of Net Profit Margin and Asset Turnover:
