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115 CFA

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115.040.06.03 Financial Analysis - Reading 24 - 3. The DuPont System

# 3. The DuPont System

## d. demonstrate the application of DuPont analysis of return on equity and calculate and interpret effects of changes in its components;

What is DuPont analysis?

DuPont analysis breaks ROE (return on equity) into three parts. This analysis enables the analyst to understand the source of superior (or inferior) return by comparison with companies in similar industries (or between industries).

What is the three-part formula for the DuPont Analysis?

- $$ROE = net\ profit\ margin * asset\ turnover * equity\ multiplier$$

- $$ROE = \frac{net\ income}{revenue} * \frac{revenue}{average\ total\ assets} * \frac{net\ income}{average\ total\ assets}$$

How is the extended DuPont model different than the DuPont model?

The extended DuPont model takes the three factors and incorporates the effect of taxes and interest based on the level of financial leverage.

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- CFA