Understanding the DuPont Analysis System
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ScribdTranslationsUnderstanding the DuPont Analysis System
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ScribdTranslationsIntroduction
The Dupont system is a very important financial indicator in performance analysis.
economic and labor of a company. This system combines the main indicators
financial to determine the level of efficiency with which the company is
using its assets, its working capital and the capital multiplier (credits or
loans).
These three factors are responsible for the economic growth of a company, which
obtains its resources from a good profit margin on sales or from effective use of its
fixed assets, as well as the effect that financial costs have on profitability
for the use of financed capital to develop its operations.
These variables are responsible for economic growth in a company, which
acquires its resources through a profit margin on its sales or by being efficient
use of its fixed assets. Considering that a company's profitability depends
of three variables, such as the profit margin on sales, asset turnover, and the
rotation of its financial leverage, we understand that the Dupont system
identify the way to obtain profitability from a company to identify its points
strong or their weak points1.
The Dupont analysis system is used to conduct a thorough financial analysis of
the company's financial statements and assess its financial situation. For this
analysis is necessary to have the definitive financial statements, Income Statement and
gains, Balance generates in two measures of profitability, the return on
total assets RSA, or ROA in English, and return on equity or
capital RSP or ROE by its English initials.2
1
htps://[Link]/sistema-dupont-se-utliza
2
GITMAN, LAWRENCE J. y ZUTTER, CHAD J. Principios de administración financiera, PEARSON EDUCACIÓN, México, 2012
DuPont Analysis System
It is one of the most important profitability financial ratios in the analysis.
of the economic and operational performance of a company. The Dupont analysis
thoroughly analyze the company's financial statements and evaluate its
situación financiera. Resume el estado de pérdidas y ganancias y el balance
general in two measures of profitability: return on total assets
(RSA) and return on equity (RSP).3
System that integrates or combines the main financial indicators in order to
determine the efficiency with which the company is utilizing its assets, its capital
of labor and the capital multiplier (Financial leverage).
In principle, the DUPONT system combines the net profit margin, the turnover
of the company's total assets and its financial leverage.
These three variables are responsible for the economic growth of a
company, which obtains its resources either from a good profit margin in the
sales, or an efficient use of their fixed assets which implies a good turnover
of these, the same as the effect on profitability that costs have
financial costs for the use of financed capital to develop their operations.
Starting from the premise that the company's profitability depends on two
factors such as profit margin in sales, asset turnover and of
financial leverage, it can be understood that the DUPONT system what
What it does is identify the way in which the company is obtaining its profitability, the
which allows you to identify your strengths or weaknesses.
Profit margin on sales
There are products that do not have a high turnover, that only sell one at a time.
week or even a month. Companies that sell this type of products
depend largely on the profit margin that remains for each sale.
Managing a good profit margin allows them to be profitable without selling a
large number of units.
The companies that use this system, although they may have a good
profitability, they are not efficiently utilizing their assets or working capital,
since they must have a fixed capital for a longer time.
3
GITMAN, LAWRENCE J. y ZUTTER, CHAD J. Principios de administración financiera, PEARSON EDUCACIÓN, México, 2012
1
Efficient use of your fixed assets
The opposite case occurs when a company has a lower margin in the
utility over the selling price, but which is offset by the high turnover of
their products (Efficient use of their assets). A product that only has a
5% utility but with daily turnover is much more profitable than a
product that has a profit margin of 20% but its turnover is one
a week or more.
In a practical example and assuming the reinvestment of profits, the product
with a 5% margin but has a daily turnover, in a week (5
days) its profitability will be 27.63%, (25% if the profits are not reinvested),
while a product that has a profit margin of 20% but with
weekly rotation, in one week its profitability will only be 20%.
The above means that profitability is not always in selling at a higher price.
but rather to sell a larger quantity at a lower price.
Capital multiplier
It refers to the so-called financial flattening, which consists of the
possibility of financing investments without the need to have
own resources.
In order to operate, the company requires some assets, which can only be
to be financed in two ways; first, through contributions from the partners
(Heritage) and secondly credits with third parties (Liabilities). Given these circumstances,
The greater the financed capital, the higher the financial costs for it will be.
capital, which directly affects the profitability generated by assets. It is due to
that the DUPONT system includes financial leverage (Multiplier
of capital) to determine the profitability of the company, since every asset
financed with liabilities incurs a financial cost that directly affects the
profitability generated by the profit margin on sales and/or by efficiency in
the operation of the assets, the other two variables considered by the system
DUPONT.
It is of little use for the profit margin to be high or for the assets to be operated.
efficiently if you have to pay high financial costs that
they end up absorbing the profitability obtained from the assets.
2
On the other hand, financing assets with liabilities carries an implicit risk.
financial due to the uncertainty of whether the profitability of the assets can be achieved
to cover the financial costs of its financing.
DuPont Formula
The DuPont system first relates the net profit margin, which measures the
profitability of the company's sales, with the turnover of total assets, which
indicates the efficiency with which the company has used its assets to generate
sales. In the DuPont formula, the product of these two ratios results in
the return on total assets (ROA).
RSA =Margen de utilidad neta * Rotación de activos totales
By substituting the appropriate formulas into the equation and simplifying the results in the
previously presented formula,
The Dupont formula allows the company to break down its performance into the
utility components regarding sales and efficiency of asset use. For
generally, a company with a low net profit margin has a high turnover
of total assets, which produces a return on total assets
reasonably good. The opposite situation often arises.
Modified Dupont Formula
The second step of the Dupont system uses the modified Dupont formula, which
relates the return on total assets of the company (RSA) with its
return on equity (ROE). The latter is calculated by multiplying the
return on total assets (ROA) by the leverage multiplier
financial (MAF), which is the ratio between the company's total assets and its
capital and common stock.
RSP =RSA x MAF
3
Substituting the appropriate formulas into the equation and simplifying the results
in the formula presented before,
The use of the financial leverage multiplier (FLM) to convert the RSA
in RSP reflects the effect of financial leverage on performance that
the owners obtain.
Practical case company El Ejemplo, S.A.
Based on the financial statements of the company El Ejemplo, S.A. below
the analysis is done under the Dupont system.
Based on the results obtained using financial analysis formulas
DuPont, we can conclude that the low return on equity (ROE) could
due to the delay in customer accounts and consequently, they increase the
levels of assets, this situation reduced the return on total assets
RSA
4
Conclusion
Its main usefulness is that it allows for decision-making in order to elevate the
financial profitability. To achieve this, it is essential to identify where the company
needs to improve its operations.
Also show the evolution of the company over time, if we take into account the
historical data. It also allows simulating the impact of certain
actions in different scenarios.