DuPont analysis is a commonly measure for the return on equity (ROE). The DuPont coefficient is a product of net profit margin, asset turnover ratio and equity multiplier (Jin, 2017). Net profit margin is the central measure of profitability which provides a percentage of revenues kept as net profit (Husain & Sunardi, 2020). The asset turnover ratio demonstrates how well the company uses its assets to generate revenues (Heisinger & Hoyle, 2018). Finally, equity multiplier is the percentage of total assets financed by equity (Heisinger & Hoyle, 2018). Thus, DuPont analysis allows to decompose the return on equity ration to see the highest contributor. The analysis is provided in Table 1 below.
Table 1. DuPont Analysis
The analysis demonstrated that the company’s DuPont Coefficient increased significantly between 2019 and 2021. This demonstrates that the company’s use of investments of shareholders increased by 3 times between 2021. The increase in the coefficient is attributed to an increase in all aspects of the DuPont ratio. Net profit margin increased from 21% in 2019 to 26% in 2021. The efficiency of asset used measured by asset turnover ratio increased from 0.77 in 2019 to 1.04 in 2021. The increase in profitability and asset management efficiency is a positive tendency in the company’s performance. However, the equity multiplier also increased from 3.74 in 2019 to 5.56 in 2021, which implies that the company’s use of debt to finance its assets increased. Therefore, in order to reduce future risks, it is recommended that the company decreases its financial leverage in the future.
References
Heisinger, K., & Hoyle, J. B. (2018). Managerial accounting. Flatworld Knowledge.
Husain, T., & Sunardi, N. (2020). Firm’s Value Prediction Based on Profitability Ratios and Dividend Policy. Finance & Economics Review, 2(2), 13-26.
Jin, Y. (2017). DuPont analysis, earnings persistence, and return on equity: Evidence from mandatory IFRS adoption in Canada. Accounting Perspectives, 16(3), 205-235.