DuPont analysis is used to determine a company’s ability to increase its return on equity (ROE) ratio. It accomplishes this by multiplying the company’s net profit margin (net income / sales) by its total asset turnover ratio (sales / average total assets) and then multiplying the result by the company’s financial leverage (average total assets / average shareholders’ equity). The financial leverage of a company is the amount of debt which it uses in relation to its total income.
The DuPont analysis system was first developed and implemented by the management of the DuPont Corporation. It provides a clearer picture of a company’s true ROE than simple ROE calculations (net income / average shareholders’ equity), and is often used in fundamental analysis.
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