Question

What is the DU point Method, what does it explain?

How is it done (the formula)? How can we use it?

Answer 1

Du Pont is another method from an ROE(Return on Equity) perspective to know the firm's financial leverage,assets and it's turnover and profit margins. Basically Du Pont Method cuts down the ROE formula into three parts. This can be explained by discussing the formula.

Du Pont = Operating Efficiency * Net Profit Margin * Asset Turnover Ratio

Whereas Net Profit is calculated as dividing Net Income by Revenue ;

Asset Turnover is calculated as dividing Sales by Average Sales Ratio;

Operating Efficiency is calculated as dividing average assets by average Equity.

We use this for the purpose of knowing the firm's use of debt to finance it's assets, how efficiently company is using it's cash and assets, and how much profitable it is by its revenue and costs.