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The following are some articles on DuPont Model

 DUPONT System –Overview Of Return On Assets & Return On Equity

 DUPONT System-A Matter Of Leverage Or Is It [...]

In my earlier article on the DuPont System, I put forth what the DuPont System is and attempted to elaborate on its three (3) components. There should not have been any problems in understanding Return on Assets (ROA) since ROA essentially consists of profitability coupled with the efficiency of using the company’s assets to generate the desired level of ROA %.

But, what about this so-called Financial Leverage Multiplier (FLM), which is defined as the ratio of Total Assets to Shareholders’ Equity – namely the degree of reliance on financing from borrowing and bonds?

Let’s us go back to basics. A higher Total Assets to Shareholders’ Equity means a higher level of leverage as the denominator, the shareholders have less stake in the total assets. For example, total assets is $1million and shareholders’ funds might be a $500,000 which is 2x compared to say a shareholder fund of $1,000 which is 100x which will then lead the company to extremely high gearing exposure. During a recession, when returns from business dip, it will definitely not able to service its interest from these high borrowings.

However, if we were able to MANAGE the efficiency of leverage or the level of financial efficiency we can definitely see a rise in Return on Equity, which all shareholders love to have (on the proviso that ROA % is also on a rising trend)

Continue reading DuPont System: A Matter of Leverage or Is It FINANCIAL EFFICIENCY?

The DuPont System was developed by DuPont Corporation to dissect a firm’s financial statement, so as to assess its financial condition.

It merges the Income Statement and Balance Sheet into two summary measures of profitability: Return On Total Assets (ROA) and Return On Equity (ROE). The top portion focuses on Income Statement & bottom on balance sheet.

Its allow us to break ROE into 3 components:

1. as a Profit on Sales,
2. as an efficiency of asset-use, and
3. finally on use-of-leverage

By breaking it into 3 components, we can obtain a very detailed analysis of the financial health of the company.

Continue reading DuPont System: Overview & ROA & ROE