Is the company you’re invested in generating value?💹
Let us look at a detailed method to calculate this return 🔎
The DuPont way!
A thread🧵👇 #LearnWithICICIDirect #FundamentalFriday
Let us look at a detailed method to calculate this return 🔎
The DuPont way!
A thread🧵👇 #LearnWithICICIDirect #FundamentalFriday
[1] What is DuPont?
🔶DuPont is an American chemical MNC
🔶Started as a supplier of gunpowder in 1802
They introduced the DuPont method for calculating Return on Equity in the 1914
This was eventually adopted by car majors like Ford
🔶DuPont is an American chemical MNC
🔶Started as a supplier of gunpowder in 1802
They introduced the DuPont method for calculating Return on Equity in the 1914
This was eventually adopted by car majors like Ford
[2] DuPont ROE method
🔸Introduced in 1914
🔸To bring internal efficiency to the company
🔸Formed by explosive salesman Donaldson Brown who eventually became the CFO of General Motors
How is it calculated?🤔
Confusing? Let’s break it up in the thread below👇
🔸Introduced in 1914
🔸To bring internal efficiency to the company
🔸Formed by explosive salesman Donaldson Brown who eventually became the CFO of General Motors
How is it calculated?🤔
Confusing? Let’s break it up in the thread below👇
![[2] DuPont ROE method
🔸Introduced in 1914
🔸To bring internal efficiency to the company
🔸Formed by...](https://pbs.twimg.com/media/FvXT9gdWwAEfLkS.png)
[3] ROE Calculation
The general Return on Equity calculation
=Net Income/ Shareholders Equity
If your net income is 25 and the amount invested is 100
The ROE will be 25%
The general Return on Equity calculation
=Net Income/ Shareholders Equity
If your net income is 25 and the amount invested is 100
The ROE will be 25%
[4] How is DuPont's ROE different?
A normal ROE considers
🔸The Net Income per rupee of equity
DuPont’s makes us look at:
🔸The Net Profit Margin
🔸Asset Turnover Ratio
🔸Co's Financial Leverage
Provides us with a detailed method to understand the business’ efficiency
A normal ROE considers
🔸The Net Income per rupee of equity
DuPont’s makes us look at:
🔸The Net Profit Margin
🔸Asset Turnover Ratio
🔸Co's Financial Leverage
Provides us with a detailed method to understand the business’ efficiency
[5] Net Profit Margin
This is calculated as
=Net Income/Revenue
🔸For each rupee of sales;
🔸What profit does the company earn?
🔸How efficiently are their costs being managed?
If your profit is 25 and revenue is 100. You have a net profit margin of 25%
This is calculated as
=Net Income/Revenue
🔸For each rupee of sales;
🔸What profit does the company earn?
🔸How efficiently are their costs being managed?
If your profit is 25 and revenue is 100. You have a net profit margin of 25%
[6] Asset Turnover Ratio
=Revenue/ Average Total Assets
The total assets of the company is the money that is invested and held in assets
Does this translate into revenue?
If you have 200 worth of assets and have 100 of sales.
You will have an asset turnover ratio of 0.5
=Revenue/ Average Total Assets
The total assets of the company is the money that is invested and held in assets
Does this translate into revenue?
If you have 200 worth of assets and have 100 of sales.
You will have an asset turnover ratio of 0.5
[7] Financial Leverage
=Average Total Assets/Average Total Equity
🔶How much is the company using liabilities to fund its assets
🔶Are they heavily indebted?
If you have an average total assets of 200 and an average total equity of 100.
The Financial Leverage is 2
=Average Total Assets/Average Total Equity
🔶How much is the company using liabilities to fund its assets
🔶Are they heavily indebted?
If you have an average total assets of 200 and an average total equity of 100.
The Financial Leverage is 2
[8] Calculation of DuPont ROE
= Net Profit Margin X Asset Turnover Ratio X Financial Leverage
= 25% X 0.5 X 2
This is 25%
Hold on a minute. This is the same final number as the previous ROE calculation.
= Net Profit Margin X Asset Turnover Ratio X Financial Leverage
= 25% X 0.5 X 2
This is 25%
Hold on a minute. This is the same final number as the previous ROE calculation.
[9] Why DuPont’s ROE instead (1/2)?
This ratio provides the investor with more information
If two companies have similar Return on Equity it gives you multiple additional ways to evaluate them
This ratio provides the investor with more information
If two companies have similar Return on Equity it gives you multiple additional ways to evaluate them
[10] Why DuPont’s ROE instead (2/2)?
🔸Improved Net Profit Margins: An idea of growing profitability
🔸Better Asset Turnover Ratio: Assets invested in are creating revenue
🔸Lower Financial Leverage: Less chance of default of the company
🔸Improved Net Profit Margins: An idea of growing profitability
🔸Better Asset Turnover Ratio: Assets invested in are creating revenue
🔸Lower Financial Leverage: Less chance of default of the company
TL;DR:
[1] What is DuPont?
[2] DuPont ROE method
[3] ROE Calculation
[4] How is DuPont's ROE different?
[5] Net Profit Margin
[6] Asset Turnover Ratio
[7] Financial Leverage
[8] Calculation of DuPont ROE
[9] Why DuPont's ROE instead (1/2)?
[10] Why DuPont's ROE instead (2/2)?
[1] What is DuPont?
[2] DuPont ROE method
[3] ROE Calculation
[4] How is DuPont's ROE different?
[5] Net Profit Margin
[6] Asset Turnover Ratio
[7] Financial Leverage
[8] Calculation of DuPont ROE
[9] Why DuPont's ROE instead (1/2)?
[10] Why DuPont's ROE instead (2/2)?
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2. Retweet this tweet👇
#LearnwithICICIDirect
Disclaimer: Investments in securities markets are subject to market risks. Please read all related documents carefully.
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