DuPont Analysis

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DuPont Analysis

An alternative calculation of the return on equity of an investment. DuPont analysis utilizes the investment's gross book value instead of its net book value. It is calculated as:

(Profits / Sales) * (Sales / Assets) * (Assets / Equity) = DuPont Analysis return on equity

The theory behind DuPont analysis states that forms of return on equity using net book value discourage investment in new, potentially risky ventures because they underestimate the return for the first few years of the investment. The DuPont calculation attempts to remedy this situation.
References in periodicals archive ?
ABSTRACT: Donaldson Brown developed the expanded Return on Investment (ROI) measure, or DuPont formula, in 1914.
A January 1996 article in Scientific American noted the hearty timelessness of Donaldson Brown's then 82-year-old return-on-investment (ROI) measure, also known as the DuPont formula ["How Much Bang for the Buck?
It was at this point that he developed the procedure now known as the DuPont formula.
In other words, as the title of a 1927 article by Brown indicated, the use of the DuPont formula provided "Centralized Control with Decentralized Responsibility" [Brown, 1927].
In effect, the strategy map decomposes the organization's primary objectives into customer, process, and learning and growth objectives in a way that is reminiscent of the way that the Dupont formula decomposed the return on investment metric into front-line operational measures.
Now that we have the DuPont formula ratios, we can use them to project Ajax's 2000 financial statements which will demonstrate that G is a comprehensive constraint on growth.
You can clearly see a company's alternatives for increasing its sustainable growth rate by using the DuPont formula in the formula for G.
The Dupont formula approach of breaking down ROI into margin and turnover is well-known and well-utilized.