DuPont Analysis is a financial analysis framework that has become a staple of modern investment analysis. With its ability to break down Return on Equity (ROE) into its constituent parts, it is a crucial tool for understanding a company's financial performance.

In this article, we will delve into the world of DuPont Analysis and explore its importance. We will also show you what DuPont Analysis is, the DuPont Analysis formula behind it, and how to use a Business Intelligence (BI) tool FineBI to create a DuPont Analysis example. By the end of this guide, you will have a comprehensive understanding of DuPont Analysis and how it can help you make more informed investment decisions.

The DuPont analysis is a valuable tool for investors that can be utilized in both fundamental and technical analysis. However, what sets it apart from other analysis techniques?

To understand this, let's consider the example of the parameter "revenue". Revenue is calculated by multiplying total sales quantity by unit price, and an increase in either quantity or price will increase revenue. An inexperienced investor may focus solely on high revenue figures without considering the underlying factors that led to those figures, such as an excessively high unit price. It's essential to investigate further and determine why sales may be down and whether historical revenue growth was achieved through sustainable means.

This scenario highlights the reasoning behind the DuPont analysis. It breaks down the ROE into smaller components and evaluates each of these components to ensure they contribute to a desirable final value. Rather than relying solely on the basic ROE formula of net income divided by equity, the DuPont analysis takes a more comprehensive approach to evaluating a company's profitability. By examining each factor in detail, investors can make more informed decisions about where to invest their resources.

The DuPont analysis can be categorized into two groups: the 3-step and 5-step formulas. The 3-step is the original version, while the 5-step is an expansion of it.

The fundamental DuPont model equation is:

ROE = Net Profit Margin x Asset Turnover x Equity Multiplier

Both the 3-step and 5-step analyses use this formula as their foundation.

The three-step DuPont analysis formula breaks down the calculation of ROE into three components for a more comprehensive understanding of a company's financial performance.

• ROE (Return on Equity): ROE is a financial ratio that measures a company's profitability by showing how much profit it generates from the money invested by shareholders. It is calculated by dividing net income by shareholder equity.
• Net Profit Margin (NPM): NPM is a financial ratio that measures a company's profitability by showing how much profit it generates from its total revenue. It is calculated by dividing net profit by total revenue.
• Asset Turnover: Asset Turnover is a financial ratio that measures a company's efficiency in using its assets to generate revenue. It is calculated by dividing total revenue by total assets.
• Equity Multiplier: Equity Multiplier is a financial ratio that measures a company's financial leverage or the extent to which it finances its assets through debt. It is calculated by dividing total assets by shareholder equity.

By breaking down ROE into these three factors, investors can get a better understanding of the financial health of a company and its ability to generate profits.

The derivation of the 5-step DuPont analysis may appear complex. To obtain the 5-step DuPont equation, the net profit margin formula in the 3-step DuPont formula is further decomposed by replacing net income with earnings before taxes (EBT) minus taxes, since EBT minus taxes equals net income.

So how can we use the DuPont Analysis to assist with business reports? Next, we will establish a practical DuPont Analysis example by using the professional BI tool FineBI to explain it.

FineBI is a modern big data analytics & BI software designed for everyone who has need of data analysis. Everyone of any level can use FineBI to easily establish professional BI dashboards, perform self-service data analysis, gain useful insights and thus drive your business forward.

Through simple operations like drag-and-drop, you can create professional dashboards without difficulty!

In FineBI, data processing is also very convenient. Through functions such as filtering and merging calculations in FineBI, data can be processed quickly without writing SQL statements or other codes.

FineBI supports more than 50 chart styles, covering all basic and high-level charts on the market, and also has excellent dynamic effects and a powerful interactive experience. Various features can be set according to the needs during use, and can also be self-adjusted and displayed on the mobile terminal and large LED screen.

Let's now demonstrate how to use FineBI for quick DuPont Analysis analysis.

Firstly, Let's upload the sample data to FineBI.

FineBI is fully capable of managing data from multi-source based on business need. Including database tables, SQL sets, Excel, self-service data sets, and etc. And FineBI also supports instant classification.

You can get the sample data from the help document of DuPont Analysis and download FineBI for free to follow the steps and create DuPont Analysis of your own!

The sample data gives two data tables profit data and asset-liability data. But when performing DuPont analysis, the data in the two data tables need to be used for calculation at the same time. So the two data tables need to be merged.

Select the "Company profit data" table and select all fields, as shown in the figure below:

Select the "merge up and down" step, select the "Analysis of the company's assets and liabilities" table, and click "OK", as shown in the figure below:

Name and save the self-service dataset.

Click "Dashboard" to create a new dashboard and name it, click "OK" to create a component, select "Self-service dataset 4" and click "OK", as shown in the following figure:

Select the "Current amount" indicator, click the drop-down, select "Copy", name it "Net profit" and select "Detail Filtering", as shown in the figure below:

Select the detailed filter condition as "Account name" in "Net profit", click "OK", as shown in the figure below:

Or "Account ID" in "500", as shown in the figure below:

In the same way, copy the "Current amount" indicator again, rename it to "Sales revenue", and perform "Detail Filtering", select the filter condition as "Account Name" in "Including operating income", click "OK", as shown in the figure below:

Add a calculation indicator, name it "Net profit margin on sales", enter the formula: SUM_AGG (Net profit)/SUM_AGG (Sales revenue). Click "OK", as shown in the figure below:

The calculation method is the same as in section 2.3.

Copy the "Closing mount" field, rename it to "Total assets" and set detailed filter conditions for total assets: "entry name" in "Total assets", or the Project ID belongs to "100", as shown in the following figure:

Add the calculation indicator again, name it and enter the formula: SUM_AGG (Sales revenue)/SUM_AGG (Total assets).Click "OK", as shown in the figure below:

1) First calculate the Asset liability ratio=total liabilities/total assets

Therefore, you need to create the "Total Liabilities" indicator, copy the "Closing amount", rename it to "Total liabilities" and set the detailed filter conditions as follows: "Project ID" in "20022099" (or use filter conditions: "Project name" in "Total liabilities"). As shown below:

Add the calculation indicator again, name it and enter the formula: SUM_AGG (Total liabilities)/SUM_AGG Ttotal assets). Click "OK", as shown in the figure below:

2) Add a calculation indicator, name and enter the formula: 1/(1-Asset liability ratio). Click "OK", as shown in the figure below:

Return on net assets = Net profit margin on sales * Asset turnover * Equity multiplier

Add a calculation indicator, name it and enter the formula: Net profit margin on sales * Asset turnover * Equity multiplier. Click "OK", as shown in the figure below:

Select "kpi indicator card", drag "Return on net assets" into the text box, and set the format, as shown in the figure below:

Create indicator cards in the same way for other indicators.

And then, the DuPont Analysis model will be done!

You can combine the finished KPI Indicator Card of DuPont Analysis model with other graphs and charts to form a Dashboard just like the picture below to help you better analyze your data.

Using FineBI makes it easy to build various classic data analysis models, such as the DuPont Analysis model discussed in this article, as well as other models like the BCG Matrix (Growth Share Matrix), RFM Model, Kano Model, etc., to help businesses gain insights.

FineBI offers business theme analysis scenarios for different industries, including manufacturing, pharmaceuticals, retail, finance, and more. By analyzing and displaying business indicator data, relevant managers can easily grasp business dynamics.

FineBI can liberate business professionals from the quagmire of data processing and visualization, allowing them to focus more on data analysis, management, and business communication.

Now you should grasp the basics of DuPont analysis! I have also listed the FAQs of DuPont analysis in case you have some other questions. Check it out!

The name DuPont analysis was derived from F. Donaldson Brown, an employee of DuPont who created a formula in 1914. The company utilized this formula as an internal management tool to gain a better understanding of its operational efficiency and areas of weakness. By breaking down the ROE into a more intricate equation, the DuPont analysis identifies the underlying reasons for changes in this metric.

The DuPont model unveils the underlying factors that contribute to a company's profitability, as measured by its return on equity. By comparing the performance of various companies, it identifies the strengths and weaknesses of a particular firm. Moreover, it evaluates a company's operational and asset utilization efficiency, as well as its financial leverage.

While the DuPont analysis can be a very helpful tool for managers, analysts, and investors, it is not without its weaknesses. Its expansive nature means that it requires several inputs. As with any calculation, the results are only as good as the accuracy of the inputs.

This tool utilizes data from a company's income statement and balance sheet, some of which may not be entirely accurate. Even if the data used for calculations are reliable, there are still additional potential problems, such as the difficulty of determining the relative values of ratios as good or bad compared to industry norms.

Seasonal factors, depending on the industry, can also be an important consideration since these factors can distort ratios. For instance, some companies always carry a higher level of inventory at certain times of the year. Different accounting practices between companies can also make accurate comparisons difficult.

DuPont analysis is a valuable tool for breaking down the various factors that influence a business's return on equity. This enables investors to identify which financial activities are responsible for the most significant changes in ROE. Such an analysis can be utilized to evaluate the operational efficiency of two comparable companies.

Typically, a higher ratio is desirable. However, it's worth noting that some management teams may reduce prices to boost sales, which can lower net profits. Cost-efficient firms, such as Wal-Mart, have effectively utilized this strategy. Additionally, the turnover of assets (i.e., sales divided by total assets) is a crucial factor to consider.

DuPont Analysis is a crucial technique for understanding a company's profitability, but it can be challenging to implement without the right tools. That's where Finebi comes in.

With Finebi's powerful BI capabilities, you can easily analyze financial data and uncover the drivers behind a company's ROE. Don't let a lack of tools hold you back from unlocking valuable insights. Download Finebi for free and see how it can help you take your financial analysis to the next level.