DuPont Equation Calculator

DuPont Equation Analysis

This calculator can be used to conduct a DuPont analysis, which consists of ROA, ROE, profitability, asset efficiency, and financial leverage metrics. The calculator needs a total of four inputs, including a company’s:

• Total assets, which can be found on the balance sheet
• Total owners’ equity, also known as shareholders’ equity, which can be found on the balance sheet
• Total sales, also referred to as revenue, which is found on the income statement
• Net income, which can also be found on the income statement

The calculator then provides the user with the five outputs of a DuPont analysis, including the company’s:

• Return on Assets, which can be found by dividing net income by total assets or multiplying net income times asset turnover
• Return on equity, which can be found by dividing net income by total equity or multiplying the next three outputs
• Net profit margin, which is found by dividing net income by sales
• Asset turnover, which is found by dividing sales by total assets
• Equity multiplier, which is found by dividing total assets by total equity

The DuPont Equation and the Analysis of Companies

The DuPont equation gets its name from the DuPont company, which started using this formula back in the 1920’s as an indicator of operational efficiency. Donaldson Brown is credited with coming up with the concept. The beauty of this formula is how a simple ratio can be expanded to better understand how a company can improve operations.

Return on Assets

The first part of this analysis starts with Return on Assets, or ROA, which tells analysts how efficiently a company is using its assets to produce profits. The formula for ROA is as follows:

Return on Assets = Net Income / Total Assets

Expanding this formula, we can restate ROA as:

• Return on Assets = (Net Income / Sales) x (Sales / Total Assets), where
• Net Profit Margin = (Net Income / Sales), and
• Asset Turnover = (Sales / Total Assets)

By expanding the formula for ROA, a company can better understand where it might be under-performing relative to its competitors. All these variables are available on a publicly-traded company’s balance sheet or income statement. For example, if DuPont compared its ROA to its peer group and discovered its return was lower, it could drill down and look at its peer group’s net profit margin or asset turnover to see which of these ratios was under-performing. In fact, to better understand all the levers DuPont could pull to improve operations, these ratios could be further expanded to this final form:

Return on Assets = ((Sales – Total Costs) / Sales) x (Sales / (Current Assets + Non-Current Assets))

Return on Equity

The same approach applies to the second part of this analysis. Return on Equity, or ROE, tells analysts how efficiently a company is using the money provided by shareholders to produce profits. The formula for ROE is as follows:

Return on Equity = Net Income / Total Equity

Expanding this formula, we can restate ROE as:

• Return on Equity = (Net Income / Sales) x (Sales / Total Assets) x (Total Assets/ Total Equity), where
• Net Profit Margin = (Net Income / Sales), and
• Asset Turnover = (Sales / Total Assets), and
• Equity Multiplier = (Total Assets / Total Equity)

Once again, by expanding the formula for ROE, a company can better understand where it might be under-performing relative to its competitors since all these variables are available on a balance sheet or income statement. For example, if DuPont compared its ROE to its peer group and discovered its return was lower, it could drill down and look at its peer group’s net profit margin, asset turnover, or equity multiplier to see which of these ratios was under-performing. Here again, to better understand all the levers DuPont could pull to improve operations, these ratios could be further expanded to this final form:

Return on Assets = ((Sales – Total Costs) / Sales) x (Sales / (Current Assets + Non-Current Assets)) x (Current Assets + Non-Current Assets) / Total Equity))

The DuPont Equation and Ratio Benchmarks

While companies can use a DuPont analysis to benchmark their performance against their peer group or industry, it can also be used to monitor performance over time. Since financial ratios can be vastly different for various industries, it’s not possible to state whether a ratio is good or bad unless it’s being compared to a historical trend or a peer group. However, it is possible to make some generalizations about the ratios presented by this calculator. For example, higher values for ROA, ROE, asset turnover and net profit margin are deemed good. Equity multiplier is a measure of financial leverage. Higher values indicate more debt relative to equity, so lower values are thought to be better.
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