How to Use the DuPont Model

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How to Use the DuPont Model
claude rougeot, Management Consultant, Cote Divoire (Ivory Coast)

DuPont Model is a very ancient formula and it is very useful.
In the simpler expression = EBIT / Revenue * Revenue / funds engaged =.
Funds engaged = fixed assets plus working capital needed.
The first term of formula gives the result of the management work, what is the margin produced! The second term indicates the productivity of funds committed in a business.
My professional speciality is the study of investments and to raise funds to finance the project.
Heavy industry, large commercial margin and low productivuty of capital. How many $ I produce with one $ of investment.
At the opposite, light industry, low margin and high productivity of funds invested.
In my case, the taxation and modality of financing are not taken in consideration in a first appraisal. The last is completed by the IRR calculation.
With the two, Dupont Model simplfied and IRR you can advise companies in a first appraisal of projects (large spectrum at the beginning)..
From my point of view, the Dupont Model is the more clever synthesis and simple model to select various projects in competition in the pipeline
I use it from many years, more than 30 years.
It can be used in case of current company or about project. It is discriminent.
Naturally, I use more sophisticated tools to evaluate in details, but you obtain a main picture of the siutation with Dupont Model.
What is important, concerning the future, is to take in consideration the uncertainty and to be able to define a realistic context and performance linked.
Everyone is able to add more details and parameters in the Dupont Model, it is in relation with the specific objective followed.
The Dupont Model is universal!
Thank you for attention..

Multi-year Dupont Model
Wes Patterson, Other, United States
I have found that a single year snapshot of the Dupont Model can be misleading, while a multi-year view is quite informative.
Such a perspective assumes the RATE of improvement in ROI is the ultimate goal (rather than the ROI of a single period).
This multi-year view can also expose which elements of the business are improving or need additional focus.

Dupont Model Contributions
claude rougeot, Management Consultant, Cote Divoire (Ivory Coast)
Dear Wes,
Thank you for this comment.
Usually, financial analysis are statics (one year) and dynamic considering the past period of 2 or 3 years. With the two, we are able to identify trend(s) of major indicators of perf.
Considering the future, we have to consider uncertainty. Currently, we define a realistic position as an average scenario and we investigate optimistic scenario and adverse with negative conditions. This a classical and simple, but effective, method.
If we want to get a more productive approach we consider discrete variations of main factors of future performance around a central position --more realistic scenario.
Main variables are: level of activity, revenues and more sensitive costs. 1st approach, direct costing and cost of period (structure cost semi variable). It's possible to calculate for each year considered the economic rate with the Dupont's model. The last give a trend. If you want, I can give the main indicators used in financial engineering.



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