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
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.