**Financial Statement Analysis – DuPont Analysis**

DuPont Analysis is a powerful tool used to analyse a company’s financial performance by breaking down its return on equity (ROE) into three components :- **Profitability, Efficiency, and Leverage.**

**Formula:**

The DuPont Analysis formula is derived from the basic accounting identity that states:

**$ROE=NetProfitMargin×AssetTurnover×EquityMultiplier$**

Where:

**Net Profit Margin**= Net Income / Total Revenue**Asset Turnover**= Total Revenue / Average Total Assets**Equity Multiplier**= Average Total Assets / Average Shareholders’ Equity

**Interpretation:**

**Net Profit Margin**: This ratio measures how much profit a company generates from each dollar of revenue. A higher net profit margin indicates greater profitability.**Asset Turnover**: This ratio measures how efficiently a company utilizes its assets to generate revenue. Higher asset turnover suggests better efficiency in asset utilization.**Equity Multiplier**: Also known as financial leverage, this ratio measures how much of the company’s assets are financed by equity compared to debt. A higher equity multiplier implies greater leverage.

**Example:**

Let’s use a hypothetical example to illustrate DuPont Analysis.

Suppose Company ntaugcnet.com has the following financial data for the fiscal year ending March 31, 2024:

- Net Income: 500,000
- Total Revenue: 2,000,000
- Average Total Assets: 1,500,000
- Average Shareholders’ Equity: 1,000,000

**Calculation:**

**Net Profit Margin**: $NetProfitMargin=NetIncome/ Total Revenue$

$NetProfitMargin,,,=0.25$

**Asset Turnover**: $TotalRevenue /AverageTotalAssets$

$AssetTurnover$=2,000,000 / 1,500,000=1.33

**Equity Multiplier**: $EquityMultiplier=AverageTotalAssetsAverageShareholdersEquity$

$EquityMultiplier,,,, =1.5$

**DuPont Analysis:**

$ROE=NetProfitMargin×AssetTurnover×EquityMultiplier$

$ROE=0.25×1.33×1.5=0.50$

**Conclusion:**

In this example, Company ntaugcnet.com ROE is 0.50 or 50%.

DuPont Analysis helps investors and analysts understand the underlying factors driving a company’s ROE, allowing for more informed investment decisions and better evaluation of management’s performance.