Financial Statement Analysis

- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Profit Margin Formula
- Profit Percentage Formula
- Profit Formula
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBITDA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- OIBDA
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Equity Ratio
- Return on Capital Employed (ROCE)
- ROCE Formula (Return on Capital Employed)
- Return on Invested Capital (ROIC)
- Return On Investment (ROI)
- Rate of Return on Investment
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- CFROI
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Total Assets Formula
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- EBITDAR
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Markup
- Markup Percentage Formula

- Ratio Analysis (17+)
- Liquidity Ratios (29+)
- Turnover Ratios (17+)
- Efficiency Ratios (7+)
- Dividend Ratios (9+)
- Debt Ratios (26+)

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Dupont Formula, derived by the Dupont Corporation in 1920, calculates Return on Equity by dividing it into 3 parts – Profit Margins, Total Asset Turnover, and the Leverage Factor and is effectively used by investors and financial analyst to identify how a company is generating its return on shareholders equity.

**DuPont Formula** (Table of Contents)

## DuPont Formula for ROE

In the 1920s, DuPont Corporation came up with a formula called DuPont ROE formula. This formula helps us understand Return on Equity (ROE) in detail.

Here’s the formula of Return on Equity as per the DuPont Corporation –

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### DuPont Formula Example

Here’s a simple DuPont formula example to illustrate DuPont ROE formula.

**Sutra Co. has the following information –**

**Net Income of the year – $50,000****Revenues of the year – $300,000****Total Assets of the company – $900,000****Shareholders’ Equity – $150,000**

Using the DuPont ROE formula, we get –

- Return on Equity = Profit Margin * Total Asset Turnover * Leverage Factor
- Or, Dupont ROE = Net Income / Revenues * Revenues / Total Assets * Total Assets / Shareholders’ Equity
- Or, Dupont ROE = $50,000 / $300,000 * $300,000 / $900,000 * $900,000 / $150,000
- Or, Dupont ROE = 1/6 * 1/3 * 6 = 1/3 = 33.33%.

If we directly find out the Return on Equity, we will get –

- Return on Equity = Net Income / Shareholdezrs’ Equity
- Or, ROE = $50,000 / $150,000 = 1/3 = 33.33%.

### Dupont ROE for Colgate

In the DuPont formula example below, we calculate the Dupont ROE of Colgate.

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- Net Income is taken after the minority shareholder’s payment. Therefore, shareholder’s equity consists of only the common shareholder’s of Colgate (not including the minority holders)
- Asset turnover has been declining over the past 7-8 years. In addition, Colgate’s profit margins have also declined over the past 5-6 years
- However, Return on Equity has not shown a declining trend. It is increasing overall.
- This is because of the Equity Multiplier (total assets / total equity). We note that the Equity Multiplier has shown a steady increase over the past 5 years and is currently stands at 30x.

### Explanation of DuPont Formula

If we break down this formula, we will be able to make sense of how it works.

- First component of the formula is the net profit margin. If we look at the formula of profit margin, it would be – Net Income / Revenues
- Second component of the formula is total asset turnover. If we look at the formula of total asset turnover, it would be – Revenues / Total Assets
- Third component in the above formula is Equity Multiplier. If we look into the formula of leverage factor, we would get – Total Assets / Shareholders’ Equity.

Now, if we put these three components as DuPont Corporation determined, we will get –

- Return on Equity = Profit Margin * Total Asset Turnover * Leverage Factor
- Or, Return on Equity = Net Income / Revenues * Revenues / Total Assets * Total Assets / Shareholders’ Equity

The magic of this particular formula is, when we multiply these three, ultimately we get – Net Income / Shareholders’ Equity.

However, if we look at each, we would be able to understand total four ratios together.

- First, we will get to know what the profitability of the company is.
- Second, we will be able to understand how efficiently the company has been utilizing its assets.
- Third, how much leverage a company has been getting.
- Fourth, we will also understand the return on equity overall.

In return on equity formula, we are not only including common shares, we are also taking preferred shares, dividends into account.

Shareholders’ equity means we will take the whole statement and the total figure at the end.

### Use of DuPont Formula

Every investor needs to be thorough with the financial ratios before ever investing in any company.

- DuPont formula will help them save time and effort. And simultaneously, they would be able to understand how efficiently a company is utilizing its resources and how leveraged the company is.
- ROE definitely throws light on the proportion between net income and the shareholders’ equity; it doesn’t allow us to understand how much profitability a firm has, how the firm has been utilizing its assets etc.
- With DuPont formula, you can calculate all. All you need to do is to look into the income statement, the balance sheet, and the shareholders’ equity statement.

**DuPont ROE Calculator**

You can use the following DuPont ROE Calculator

Profit Margin | |

Total Asset Turnover | |

Leverage Factor | |

ROE Formula | |

ROE Formula = | Profit Margin x Total Asset Turnover x Leverage Factor | |

0 x 0 x 0 = | 0 |

**DuPont in Excel (with excel template)**

Let us now do the same DuPont formula example above in Excel. This is very simple. You need to provide the two inputs of Net Income, Total Assets, Revenues and Shareholders’ Equity.

You can easily calculate the ratio in the template provided.

If we directly find out the ROE, we will get –

### DuPont Formula Video

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This has been a guide to Dupont formula, its uses along with practical DuPont formula example. Here we also provide you with Dupont ROE Calculator with downloadable excel template. Learn more from the following articles on Financial Ratios-