DuPont System Of Analysis (EXTENDED)

DuPont System (Extended)

We use extended DuPont system because it provides the additional insights into the effect of financial leverage. The concept and use of the model is the same as the basic DuPont system except for a further breakdown of components.

Combining the Operating profit margin and total asset turnover;

  EBIT                  Net Sales                       EBIT

                X                              =                     

Net Sales           Total Assets                 Total Assets

To consider the negative effect of financial leverage, we deduct the interest expense;

  EBIT                           Interest                      EBT

                        _                              =                     

Total Assets               Total Assets               Total Assets

To find the positive effect of financial leverage, we will get;

   EBT                             Total Assets             EBT

                        X                              =                     

Total Assets               Common Equity           Common Equity

Finally to reach on ROE, we multiply the tax retention rate;

   EBT                                Income Tax              EBT

                       X   1-                        =                      

Common equity               EBT                       Common Equity

 

In summary, we use the following five components in extended DuPont system of analysis;

  EBIT       

1.                             =      Operating profit margin

T. Revenue        

 

T. Revenue

2.                            =      Total asset turnover

Total Assets

 

  Interest  

3.                            =      Interest expense rate

Total Assets

 

Total Assets

4.                            =      Financial leverage multiplier

Common Equity       

income Tax       

5.     1-                             =      Tax retention rate

            EBT