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Please define duPont analysis
Posted 02 November, 2009 by Jacqueline Tianna Cherry from Mobile, United Statesi came by a term i can't grasp: what does duPont analysis mean?Currency Priestess Answers:That's a juicy term, Jacqueline. DuPont analysis is A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). It is also known as "DuPont identity". DuPont analysis tells us that ROE is affected by three things: - Operating efficiency, which is measured by profit margin - Asset use efficiency, which is measured by total asset turnover - Financial leverage, which is measured by the equity multiplier ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity) It is believed that measuring assets at gross book value removes the incentive to avoid investing in new assets. New asset avoidance can occur as financial accounting depreciation methods artificially produce lower ROEs in the initial years that an asset is placed into service. If ROE is unsatisfactory, the dupont analysis helps locate the part of the business that is underperforming.Go to
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