Analysis Nad Interfirm Comparison

DUPONT Analysis
DU PONT Analysis - Return on Investment (ROI) is one of the most important techniques
ever conceived to aid the management both in decision making and performance evaluation.
The DU PONT company of the United States pioneered this system of financial analysis
which has received wide spread recognition and acceptance. This technique was developed
by the DU PONT company for analyzing and controlling financial performance. The analysis
considers important inter relationships based on information available in financial statements.
The system of analysis brings together the net profit margin (NPM) and the total assets turn
over ratio (TATR) and shows how these ratios interact to determine profitability of assets.
Thus, the Return on Total Assets (ROTA) or Return on Investment (ROI) is defined as the
product of the net profit margin and the total assets turnover ratio.
Symbolically, it can be expressed as follows:
The analysis helps in understanding how the net return on Investments is influenced by the
net profit margin and the total assets turnover ratio.
The relation ship between the Return on Investment and the net profit margin and total
assets turnover is explained in detail in the following chart. This chart is developed by the
DU PONT Company. Hence, it is known as DU PONT chart or DU PONT Analysis.
At the top of the DU PONT chart is the Return on Investments. The left hand side of the
chart shows the details of net profit margin. Net profit margin is determined as net profit
divided by sales. Net income is arrived at by deducting total cost i.e. (cost of goods sold plus
operating expenses, Interest and Taxes) from net sales. Thus, the analysis indicates certain
areas where cost reductions may be effected to improve the net profit margin and where cost
control efforts should be directed.
The right hand side of the chart focuses on the total assets turnover ratio. The ratio is calculated
as sales divided by total assets. Total assets are a composition of fixed assets and current
assets (i.e., cash, bank, marketable securities, inventories, receivables or Debtors and others).
If the total assets turnover is supplemented by a study of other turnover ratios, like Inventory,
debtors, cash and fixed assets turnover ratios, a deeper insight can be gained into efficiencies
or inefficiencies of asset utilization. The basic DU PONT analysis may also be extended to
expose the determinants of the return on equity.
In order to make the analysis more meaningful the Return on Investment of the company
must be compared with industry averages and with the company’s own return on Investments
of the previous years. The DUPONT analysis provides relevant clues to deficiency in asset
management or lack of cost control or both, where the company’s return on Investment is
below the industry average. Further a detailed comparison of return on Investment of the
company over the past few years reveals a declining tendency, it focuses attention of the
management loosing control over expenses and inefficiently of assets management. At this point of time,
DU PONT analysis calls for prompt corrective action before the situation goes
out of control.
Inter-Firm Comparison
It is the technique of evaluating the performance efficiency, costs and profits of firms in
an industry. It consists of voluntary exchange of information/data concerning costs, prices,
profits, productivity and overall efficiency among firms engaged in similar type of operations
for the purpose of bringing improvement in efficiency and indicating the weaknesses. Such a
comparison will be possible where uniform costing is in operation.
An inter-firm comparison indicates the efficiency of production and selling, adequacy of
profits, weak spots in the organisation, etc and thus demands from the firm’s management an
immediate suitable action. Inter-firm comparison may enable the management to challenge the
standards which it has set for itself and to improve upon them in the light of the current
information gathered from more efficient units. Such a comparison may be pharmaceuticals,
cycle manufacturing, etc.
Requisites of Inter-firm comparison
The following requisites should be considered while installing a system of inter-firm

comparison:
1. Centre for Inter-firm Comparison:
For collection and analysing data received from member units for doing a comparative
study and for dissemination of the results of study a Central body is necessary. The
functions of such a body may be:
(a) Collection of data and information from its members:
(b) Dissemination of results to its members:
(c) Undertaking research and development for common and individual benefit of its
members;
(d) Organising training programmes and publishing magazines
2. Membership:
Another requirement for the success of inter-firm comparison is that firms of different
sizes should become members of the Centre entrusted with the task of carrying out interfirm
comparison.
3. Nature of information to be collected
Although there is no limit to information, yet the following information, useful to the
management is in general collected by the center for inter firm comparison.
a. Information regarding costs and cost structures.
b. Raw material consumption
c. Stock of raw material, wastage of materials etc.
d. Labour efficiency and labour utilisation.
e. Machine utilisation and machine efficiency.
f. Capital employed and return on capital
g. Liquidity of the organisation.
h. Reserve and appropriation of profit.
i. Creditors and debtors.
j. Methods of production and technical aspects.
4. Method of Collection and presentation of information:
The centre collects information at fixed intervals in a prescribed form from its members.
Sometimes a questionnaire is sent to each member, the replies of the questionnaire
received by the Centre constitute the information/data. The information is generally
collected at the end of the year as it is mostly related with final accounts and Balance
Sheet. The information supplied by firms is generally in the form of ratios and not in
absolute figures. The information collected as above is stored and presented to its
members in the form of a report. Such reports are not made available to non-members.
Limitations of Inter-firm comparison
The following are the limitations in the implementation of a scheme of inter-firm

comparison:
1. Top management feels that secrecy will be lost.
2. Middle management is usually not convinced with the utility of such a comparison.
3. In the absence of a suitable cost accounting system, the figures supplied may not reliable
for the purpose of comparison.
4. Suitable basis of comparison may not be available.
Advantages of Inter-Firm Comparison
1. It encourages managerial efficiency in the organization.

2. It creates cost consciousness among the participating firms.
3. It helps the member firms to reduce their costs.
4. It increases the productivity by locating weakness and ineconomies.
5. It provides useful information to management of every member unit to make proper decisions.
6. It stimulates self-criticism by comparing its data with the other firms.
7. It enables the firms to evaluate the data relating to the operations of the competitors.
8. It ensures the standardization of production process.
9. It helps the government, regulatory agencies and researchers in getting the useful data and
information to improve policies.

Analysis Nad Interfirm Comparison

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DUPONT Analysis

Symbolically, it can be expressed as follows:

Requisites of Inter-firm comparison

The following requisites should be considered while installing a system of inter-firm

Limitations of Inter-firm comparison

The following are the limitations in the implementation of a scheme of inter-firm

Advantages of Inter-Firm Comparison

1. It encourages managerial efficiency in the organization.

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