Dupont system of analysis (1)
- Used to analyze return on equity (2) (ROE)
- Analyst can see the impact of
- Leverage
- Profit margins
- Turnover on shareholder returns
- Two variants
- Original three-part approach (3)
- Break down a very important ratio into 3 key components
- Most important equation in ratio analysis
- If ROE is low, the reason should be
- Poor profit margin (weak operation)
- Poor asset turnover (weak investment)
- Too little leverage (weak financing)
- Extended five-part system (4)
- Original three-part approach (3)
Original approach
- ROE:
Extended Dupont equation (4)
- Take net profit margin and breaks down further
- Tax burden
- Interest burden
- Leverage rise when interest burden rise
- EBIT margin