Dupont Model

Dupont Model

The DuPont Model is essentially an expansion of the Return On Assets calculation. Unlike the standard calculation, the DuPont Model takes sales into account as a measure of profitability. The following formula can be used to apply the DuPont Model.

(Earnings Before Interest & Tax (EBIT)/Sales) x (Sales/Average Total Assets)

Subsequently, it can be shortened down to Operating Margin x Turnover

The Below formulas are standard accounting ratios, and do not reflect the theory of the DuPont Model.

Formulas

Return on equity = Operating profits after taxes/Equity

Leverage Multiplier = Assets/Equity

Return on Assets = Operating profits after taxes/Assets

Asset utilization = Revenue/Assets

Net Margin (After tax) = Operating profit after tax/Revenues

Definitions

ROE – Tells how much has been earned on the book value of ordinary shareholders’investment in the ADI

ROA – Is operating profit after tax divided by the total assets, and should reflect managements’ ability to use financial and real resources to generate revenue.

Leverage Multiplier – Is calculated by dividing assets by equity.

Asset Utilization – Reflects how effectively management has invested in earning assets by calculating the overall yields earned on the assets.

Net Margin –Represents what is left out of one dollar’s revenue after all costs have been deducted.

Origin of the DuPont Model

The DuPont Model was created by F. Donaldson Brown who was employed by DuPont Chemical Company .

DuPont