Dupont analysis

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Forbes  Jan 9  Comment 
On Thursday evening, Nelson Peltz of activist hedge fund Trian Management said that after failing to negotiate a settlement with DuPont, the firm will run a proxy campaign against the over 200-year old company, nominating four directors.
SeekingAlpha  Apr 28  Comment 
By Jim Pyke: The Coca-Cola Company (KO) and PepsiCo Inc. (PEP) are two iconic American brands and corporate behemoths based largely on their ability to sell sugar water. In 2013, KO tallied $46.9 billion in revenue while PEP, with the added...




 
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DuPont Model

The DuPont Model, developed in 1914 by F. Donaldson Brown of chemical company DuPont de Nemours & Co, is a set of financial ratios and key figures relating to the Return on Investment (ROI). It is a technique that can be used to analyze the profitability of a company using traditional performance figures. It integrates elements of the Income Statement with those of the Balance Sheet.

ROI = (Profit + Cost of Capital) / (Average Capital)

whereas cost of capital refers to the interest payment for liabilities and average capital refers to the annual average of owners equity and liabilities

Enhancing the equation with (Revenue / Revenue),

ROI = ((Profit + Cost of Capital) / Revenue) x (Revenue / Average Capital)

in words: ROI = Net Profit Margin x Total Assets Turnover

Image:dupont.gif

DuPont Analyis

The analysis of the DuPont tree (by looking at each branch and its figures) allows the manager/investor to identify the key drivers, as well as their impact on the ROI. Identified weaknesses simultaneously show up potential for improvement. It is especially well suited for benchmarking.

Although the DuPont analysis offers a clear overview of the most relevant drivers of the ROI and their interconnection, it can not replace a detailled analysis. The figures and ratios may only indicate general tendencies and developments.

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