DU Pont Analysis
DU Pont Analysis
DU Pont Analysis
Introduction:
The DuPont system of analysis uses the following formula to decompose return on
equity (ROE) into its three components:
1. Profit Margin:
This component measures a company's ability to generate profits from its
revenues. The formula for profit margin is:
Formula
Profit Margin = Net Income / Revenue
This ratio indicates the percentage of revenue that translates into net income
after accounting for all expenses. A higher profit margin indicates better
profitability.
2. Asset Turnover:
Asset turnover evaluates how efficiently a company utilizes its assets to
generate sales. The formula for asset turnover is:
Formula
Asset Turnover = Revenue / Average Total Assets
This ratio measures the amount of revenue generated for each unit of assets
employed. A higher asset turnover ratio suggests more efficient asset utilization.
3. Equity Multiplier:
The equity multiplier assesses the extent to which a company relies on debt
financing to support its operations and investment activities. The formula for the
equity multiplier is:
Formula
Equity Multiplier = Average Total Assets / Average Total Equity
This ratio indicates the proportion of total assets financed by equity compared
to debt. A higher equity multiplier suggests higher leverage or reliance on debt
financing.
LIABILITIES
Non-current liabilities
Staff retirement benefits 15,513 25,727 24,141
Long term borrowings 168,619 23,660
Deferred income - government grant 29,271
Lease liabilities 20,571 387
Deferred taxation 357,704 361,050 280,539
591,678 410,824 304,680
Current liabilities
Trade and other payables 5,257,887 4,112,349 4,263,527
Current portion of deferred income -
2,252
government grant
Current portion of lease liabilities 387 11,519 30,392
Provisions 124,524 107,740 67,251
Unpaid dividend 1,416,018 31,180 27,348
Unclaimed dividend 24,627 25,447 21,504
Accrued interest / mark up 1,876 620 34,717
6,827,571 4,288,855 4,479,956
Total liabilities 7,419,249 4,699,679 4,784,636
Total equity and liabilities 10,388,815 7,447,373 7,088,833
Du Pont Analysis Calculation
Formula:
The DuPont equation can be written as follows:
Calculation:
Nestle:
ROE = (profit Margin) × (Assets Turnover) × (Equity Multiplier)
ROE= 2.499
Unilever:
ROE = (profit Margin) × (Assets Turnover) × (Equity Multiplier)
ROE= 1.80
a) Profit Margin:
Profit Margin = Net income
Sale
Nestle Unilever
12768101 = 0.09 5169477 =0.26
133295472 19820946
b) Assets Turnover
Assets Turnover = Sales
Average Total Assets
Nestle Unilever
133295472 = 2.11 19820946 = 2.22
63155131.5 8918094
Nestle Unilever
65403898 + 60906365 = 63155131.5 10388815 + 7447373 = 8918094
2 2
c) Equity Multiplier
Equity Multiplier = Average total Assets
Average shareholders’ equity
Nestle Unilever
63155131.5 = 13.16 8918094 = 3.12
4796857 2858630
Average shareholder’s Equity:
Nestle Unilever
5403272+4190442 = 4796857 2969566 + 2747694 = 2858630
2 2
Interpretation:
Profit Margin (PM): Nestle has a lower profit margin (0.09) compared to
Unilever (0.26), which means Nestle retains less profit from each dollar of sales.
Asset Turnover (AT): Nestle has an asset turnover of 2.11, meaning it generates
$2.11 in revenue for every dollar of assets, while Unilever has an asset turnover
of 2.22, indicating better efficiency in asset utilization.
Overall, Nestle's higher ROE can be attributed to its strong asset turnover and
significant financial leverage, despite its lower profit margin. Unilever, on the
other hand, has a higher profit margin but lower asset turnover and financial
leverage, leading to a lower ROE compared to Nestle.