Du Pont Analysis

Summary：Use DuPont analysis to analyze the enterprise financial situation. From DuPont system graph, we can see that return on equity reflects enterprise financing, investment and operation and business efficiency. Total asset yield mainly reflects the enterprise use assets on the efficiency of the production and business operation activities. The equity multiplier reflects the enterprise financing situation.

Content:

Using the trend analysis and financial ratios comprehensive analysis can understand enterprise all aspects of financial status. But that cannot reflect the enterprise all aspects of the relationship between financial situations. For example, through the financial ratios comprehensive analysis, enterprise financial condition can be quite comprehensively analyzed, but can't reveal enterprise various financial ratio’s relations. In fact, the enterprise's financial situation is a complete system, internal various factors are interdependence and interaction, any single factor changes can cause enterprise overall financial situation changes. Therefore financial analysis must be based on understanding of business financial status of various factors and internal

relations between each other. So what better way could go to analyze the financial position of the company? DuPont analysis is just such a kind of analysis method.

DuPont system mainly reflects the following several major financial ratio relations:

1、 return on equity = total endowment net profit margins * rights multiplier

2、 Total endowment net profit margins = sales net profit * total asset turnover

3、net profit margin on sales = net margin/sales revenue

4、 Total asset turnover = sales revenue/assets total average

The return on equity model disaggregates performance into the three components that determine return on equity: net profit margin, total asset turnover, and the equity multiplier. The profit margin allows the financial analyst to evaluate the income statement and the components of the income statement. Total asset turnover allows the financial analyst to evaluate the left-hand side of the balance sheet which is composed of the asset accounts. The equity multiplier allows the financial analyst to evaluate the right-hand side of the balance sheet which is composed of liabilities and owners equity. Net profit

margin can be decomposed into both the income and expense components. Total asset turnover can be decomposed into interest and non-interest income components .The net profit margin ratio can be used to develop a pro forma income statement. The total asset turnover ratio can be used to estimate the pro forma left-hand side of the balance sheet. The equity multiplier ratio can be used to estimate the pro forma right-hand side of the balance sheet. Thus, the DuPont system of financial analysis can be used to construct a financial plan for the bank. The DuPont system of financial analysis provides a means for the firm to monitor performance through the planning period and to post-audit the planning process.

using an example introduce the use of DuPont analysis system:（a department store）

The enterprise's sales income, cost, assets structure, capital flow speed directly affects the discretion of the asset returns. Then the company should exploit market, strengthen the marketing method, and increase income. Meanwhile the company should strengthen cost control, reduce cost and increase profits. In addition, the enterprise’s capital structure is unreasonable, excessive debt ratios, financial risks is exorbitant. Enterprise according to the environment timely

adjusts enterprise capital structure strategy.