DuPont Analysis is a technique that can be used to analyze the profitability
of a company using traditional performance management tools. To enable this,
the DuPont model integrates elements of the Income Statement with those of
the Balance Sheet. Is is also known as "DuPont Identity".
Origin of the DuPont Model. History
The DuPont model of financial analysis was made by F. Donaldson Brown,
an electrical engineer who joined the giant chemical company's Treasury department
in 1914. A few years later, DuPont bought 23 percent of the stock of General
Motors Corp. and gave Brown the task of cleaning up the car maker's tangled
finances. This was perhaps the first large-scale reengineering effort in the
USA. Much of the credit for GM's ascension afterward belongs to the planning
and control systems of Brown, according to Alfred Sloan, GM's former chairman.
Ensuing success launched the DuPont model towards prominence in all major
U.S. corporations. It remained the dominant form of financial analysis until
The model can be used by the purchasing department or by the sales department
to examine or demonstrate why a given ROA was earned.
When ROA is poor, you can perform a DuPont analysis to find and investigate parts of the business that are cuasing that.
Compare a firm with its colleagues.
Analyze changes over time.
Teach people a basic understanding how they can have an impact on the
Show the impact of professionalizing the purchasing function.
Steps in the DuPont Method. Process
Collect the business numbers (from the finance department).
Calculate (use a spreadsheet).
If the conclusions seem unrealistic, check the numbers and recalculate.
Strengths of the DuPont Model. Benefits
Simplicity. A very good tool to teach people a basic understanding how
they can have an impact on results.
Can be easily linked to compensation schemes.
Can be used to convince management that certain steps have to be taken
to professionalize the purchasing or sales function. Sometimes it is better
to look into your own organization first. In stead of looking for company
takeovers in order to compensate lack of profitability by increasing turnover
and trying to achieve synergy.
Limitations of the DuPont analysis. Disadvantages
Based on accounting numbers, which are basically not reliable.
How to Use the DuPont Model
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...