Financial Analytics for Managerial Decisions

The DuPont analysis was first used in early 1920s by the DuPont Corporation. The DuPont analysis is an analysis of return on investment, this DuPont analysis divides the return on investment in 3 different parts. The DuPont analysis is also known as DuPont identity or DuPont equation. The DuPont analysis was first used by the DuPont Corporation; the DuPont Corporation was the first corporation to use this DuPont analysis in the year 1921. The DuPont analysis was derived by Mr. Donalson Brown in the year 1912 as a part of his internal efficiency report for his work done.

The DuPont analysis formula is as follows -

R O I = (profit margin) x (asset turnover) x (Equity multiplier)

Or

= (net profit / net sales) x (sales / Average total asset) x (average total assets / average equity) = (net Profit / Total Equity of the company)

Or

The DuPont analysis helps the user to understand the return which he / she is getting is better off or worse off as compared with other companies in same industry. The DuPont analysis is helpful for industries that function with a high margin, which have high turnovers or the industries where the leverages are high.

The main factors involved in the DuPont analysis are the financial leverage also known as equity multiplier, the asset turnover ratio and the net profit margin. These 3 elements are used as the R O E and R O A and the DuPont analysis is conducted keeping all these 3 elements in mind.

The DuPont analysis is helpful for various industries and companies within the industries but the DuPont analysis is not helpful for all types of companies and all types of industries. The industries which suffer with lack of the DuPont analysis include investment industries which have companies like banking companies, financial companies and N B F Cs and so on. The main reason why the DuPont analysis does not work in investment industry is because of the underlying asset who does not have any meaning to this industry. The main industries which use DuPont analysis are the ones which can use variation of DuPont analysis and the industries which are able to identify the development of industry in which the factors are weakly interlinked and co - related.

The industries that have high margins of profits such as fashion industry is an industry where a large portion of the competitors advantage by sale of same product with minor changes at a higher selling price so that higher profit margin is earned. Here in this case the DuPont analysis allows users to identify which factor is most essential for change in the R O I. on similar liens the highly turnover companies such as general stores have low profits on sales and less leverage so the higher the turnover the higher is the R O I.

In the given case the DuPont analysis is between Cochlear and C S L. the profit margin, asset turnover, financial leverage and R O E are the ratios which we need for our DuPont analysis. The following table -

Particulars

Cochlear

C S L

 

2018

2019

2018

2019

Profit margin

18.02 %

19.39 %

21.84 %

22.47 %

Asset turnover

1.19

1.13

0.8

0.74

Equity multiplier

5.17

5.02

6.27

6.64

R O E

42.58 %

41.40 %

47.74 %

41.12 %

From the table above we can see that Cochlear has increased its profit margin whereas it has reduced its assets. These changes in profit and assets have increased the profits of the company and it has also increased the asset turnover ratio of Cochlear. There is some reduction in the equity too.

If we look at the data provided by C S L we see that the profit margin of C S L has also increased and the asset turnover of C S L has reduced making both the companies equal but the equity of C S L has declined which has reduced the R O E to a higher level as compared to Cochlear’s R O E.

So we can conclude that the DuPont analysis indicate that Cochlear is in a better position as compared to C S L.

Working note -

Equity multiplier = average total asset / average equity

Cochlear (2019) = 1268.05 / 252.50 = 5.02

Cochlear (2018) = 1146.60 / 221.65 = 5.17

C S L (2019) =11544.45 / 1739.20 = 6.64

C S L (2018) = 9948.60 / 1586.00 = 6.27

References for Financial Analytics for Managerial Decisions

Bodie, Zane; Alex Kane; Alan J. Marcus (2004). Essentials of Investments, 5th ed. McGraw-Hill Irwin. pp. 458–459. ISBN0-07-251077-3.

Groppelli, Angelico A.; Ehsan Nikbakht (2000). Finance, 4th ed. Barron's Educational Series, Inc. pp. 444–445. ISBN0-7641-1275-9.

Phillips, Matt (9 December 2015). "The DuPont invention that changed how things work in the corporate world"Quartz (publication). Retrieved 17 May 2020.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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