The below mentioned article provides a note on du pont analysis.
The Du Pont company of USA has introduced a system of financial analysis which has received a wider acceptance. The Du Pont Chart is a chart of financial ratios, which analyses the net profit margin in terms of asset turnover.
The Du Pont analysis is used as a tool in measuring the managerial performance by linking the net profit margin to total assets turnover. Du Pont analysis is an extension of return on investment ratio, which measures the overall profitability and operational efficiency of the firm. The Du Pont analysis considers the interrelationship of accounting information given in financial statements.
Comparative analysis can be done with reference to the data of previous period or industry data or competitor’s data. The Du Pont chart indicates that the return on investment is ascertained as a product of net profit margin ratio and investment turnover ratio. The Du Pont chart is useful in segregation and identification of factors that affect the overall performance of the company.
It will be seen from the above chart that, return on investment can be improved by increasing one or both of its components viz., the net profit margin and the investment turnover in any of the following ways:
(a) Increasing the net profit margin, or
(b) Increasing the investment turnover, or
(c) Increasing both net profit margin and investment turnover.
The obvious generalizations that can be made about ROI that any action is beneficial provided that it:
(i) Boosts sales,
(ii) Reduces invested capital,
(iii) Reduces cost (while holding the other two factors constant).