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What does the Dupont Equation tells us in Ratio Analysis.

What does the Dupont Equation tells us in Ratio Analysis.

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Answer #1

Du Pont analysis helps us to do a component analysis as to which component is dragging the whole ratio down. For example,

RoE=Net Profit Margin*Asset turnover*Equity multiplier

As the above ratio RoE was deconstituted through DuPont in terms of components, we can see where the issue lies- is the company's RoE low despite good profit margin and asset turnover then equity multiplier is the issue so company has to take on more debt. Similarly for other components we can do the analysis.

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