Analytics mindset

Implementing the DuPont Method

History and model

The DuPont Method has an interesting history. E. I. du Pont de Nemours and Company, or more
frequently called DuPont, is the oldest stock in the current Dow Jones Industrial Index. Started in July
1802, the company originally focused on producing gunpowder. Today, the company makes chemicals
which are in everything from food ingredients and dietary supplements to pharmaceuticals and fabrics. In
addition to developing chemicals, the company has been a pioneer with respect to management
accounting systems. The company developed the original accounting ratio of return on equity (ROE) and
then in 1912, Donaldson Brown decomposed ROE into additional ratios. ROE measures a company’s
profitability as a percentage of shareholder’s equity (i.e., how profitable a company can be using
shareholders’ investments.) If ROE is unsatisfactory, the DuPont analysis can identify the aspect of the
business that is underperforming. DuPont used this formula for managing its business. In 1914 DuPont
invested in General Motors, and using the same basic management accounting formulas, led that
company to become the world’s largest automobile company. In 1957, DuPont divested its ownership in
General Motors because of antitrust laws. After having been highly useful for both General Motors and
DuPont, the basic DuPont Method has been extended and used by many to understand investing and
managing businesses.

The DuPont Method has evolved into the following formula:

Return on equity = Profit margin ratio * asset turnover ratio * financial leverage ratio

This can be written as follows:

Return on equity: This represents the amount of net income that is generated for each dollar of
shareholder’s equity. It can be interpreted as the amount of net income generated for each dollar of value
that a shareholder owns of the company. This number can be either negative or positive.

Profit margin ratio: This represents the amount of net income that is generated for each dollar of sales. It
can be interpreted as the percentage of each dollar of sales that the company retains as earnings. Since
net income can be negative, this ratio can be either negative or positive.

Asset turnover ratio: This represents the amount of sales that is generated for each dollar of assets the
company owns. This is often interpreted as the efficiency of the company—how many sales it can
generate given the assets it owns. Except in very unusual circumstances, this ratio is positive.

Financial leverage ratio: This represents the amount of assets that is financed by shareholders, as
opposed to debt holders. Except in very unusual circumstances, this ratio is positive.
Case overview

For this case, you will implement an analytics mindset by comparing and contrasting different companies
within different industries using the accounting ratios from the DuPont method. In Part I of the case, you
will gain an understanding of a few accounting ratios, which will help you to develop the right questions
about the companies you are analyzing. In Part II, you will load the data into Tableau and perform some
simple tests to verify that you have loaded it correctly. In Part III, you will analyze the data.

Data

In the spreadsheet, Analytics_mindset_case_studies_DuPont.xls (uploaded in Canvas), you have

financial statement data for approximately 30 companies for each of six different industry groups (total
sample size of almost 180 companies). The sheets contain financial statement information for fiscal years
2013-2015, inclusive.

For this case, you will not be using all data items. The items you are most likely to use are listed by the
name they appear in the spreadsheet with a small explanation also provided.

► Industry: One of six industry groupings: capital goods, consumer services, finance, public utilities,
technology, and transportation.

► Name: The name of the company for each line of data.

► Net income: The bottom line number on the income statement. This is the final net income number of
the company for the fiscal year.

► Net revenue: The top line number on the income statement. This represents total revenues (less a
few items that you can ignore for this case) earned by the company in the fiscal year. This is also
referred to as total sales.

► Ticker: The code used to identify each company on the stock exchange. Each company has their
own unique ticker symbol.

► Total assets: The total assets of a company at the end of the fiscal year. This number appears on the
balance sheet.

► Total shareholder equity: The total shareholder equity of a company at the end of the fiscal year. This
number appears on the balance sheet and also can be called stockholder’s equity.

► Year: The fiscal year being reported on the financial statements. For example, a year of 2015, means
the balance sheet of the company is as of the last day of their fiscal year in 2015 (usually December
31st) and the income statement for all transactions that occurred during the fiscal year.
Required to complete all three parts of the case:
► Form a project team of two or three classmates.

► Download Tableau and watch the videos: “Getting Started” and “Getting Started with Visual
Analytics”. You can find these videos in the pane on the right-side titled “Discover”. The last video is
under the section titled “Why is Tableau Doing That?”. Another great tutorial is “Tableau Essential
Training” videos available on Lynda.com. As a student you have free access to Lynda.com through
the university library. Tableau.com, Lynda.com and YouTube have videos on how to use specific
tools in Tableau.
► Submit one paper per team answering each question in the case. Must provide printouts or print
screens1 of your Tableau visualization to support your answers to questions in Part II and Part
III.
o Due February 16, 2024 at 11:59 PM. Submit one paper per team via Canvas
(Assignments tab)
o Include names of all group members

o Points will be deducted for lack of organization and clarity. Make it easy for me to link
your answer (including screenshots from Tableau) to each question.

Part I: Ask the right questions

A significant portion of developing your analytical mindset happens before you analyze data. While you
already have a fundamental understanding of the DuPont Method and are aware of the data elements
available to you, you have not yet determined the best way to analyze the data to provide the most
relevant insights. To gather the most relevant insights, you must start by asking the right questions of the
data. In this section, you will first think through the DuPont Method in more detail so you understand some
of the business context.

Required

1. Describe whether you want a high value or a low value for each ratio, independent of the other ratios.
– Return on equity:

– Profit margin ratio:

– Asset turnover ratio:

– Financial leverage ratio:

2. How can a company improve each ratio? Make sure to discuss how changes in either the numerator
or denominator can improve the ratio. For each ratio, do you think it is “better” to focus on improving
the numerator or denominator?

1
To properly copy your visual from Tableau, go to Worksheet  Copy  Image. Make sure Title, View and
Caption are checked.
Part II: Extract, transform and load the data (the ETL process)

The data for this case was extracted from company financial statements posted online from credible
sources. The extraction of the data from the online sources was performed for you and the data has been
loaded into the Excel file. That is, you can assume that the web scrapper accurately and completely
extracted the information and loaded it into Excel. Most of the transformation work has been done for you
as well. You will be required to do some transformation to analyze the data once it has been loaded into
the appropriate analysis tool (e.g., you will need to compute the ratios involved in the DuPont Method).2
You should load the data into an analytics tool for analysis—we will be using Tableau in this case.

Hint: when loading the data into Tableau, you need data from both the income statement and the balance
sheet tabs. Make sure that you link the income and balance sheet data correctly by matching the data on
both ticker symbol and year.

This is important: make sure that the data you imported from Excel appears normal in Tableau. E.g.,
You want to look at Tableau and make sure each company has three rows of data, one for each year
from 2013 – 2015. In other words, make sure the data looks the same in Tableau as it does in Excel.

Required

When you are finished loading the data, you should answer these simple questions to make sure you
loaded the data correctly (by testing for completeness and accuracy). HINT: Using a bar graph is
appropriate for Part II questions.

1. What are the combined total assets of all companies for all years?

2. How many different companies are listed in the dataset?

3. How many different companies are there in each industry?

– Capital goods

– Finance

– Public utilities

– Transportation

– Consumer services

– Technology

4. What are the total sales for each industry in 2013 (do not round your answers)?
– Capital goods

– Finance
2
Realize for many situations, extracting, transforming, and loading (ETL) the data can account for over 80 percent of the time in the
entire data analysis process. This case simplifies this process so you can focus on developing other aspects of an analytics
mindset. Also, the process does not always strictly follow the ETL format. Some transformation can happen before or after data is
loaded into a tool for analysis.
 – Public utilities

– Transportation

– Consumer services

– Technology

5. What company had the most sales over the three-year period and what was the total amount of those
sales?

Part III: Apply appropriate data analytic techniques

Required

Questions about industries

1. Which industries for fiscal year 2015 are the highest and lowest performing for each of the following
performance indicators? For measuring performance, use the median industry performance to control
for the potentially large effects of outliers. HINT: a bar graph is appropriate here.

Item Highest Lowest

Return on equity

Profit margin ratio

Asset turnover ratio

Financial leverage ratio

2. Which industry has seen the greatest improvement in median ROE from 2013 to 2015? What are the
best explanations, based on the ratios in the DuPont Method, for why the ROE has improved in that
industry? HINT: a line graph best shows changes from one year to the next.

Questions about individual companies

3. For the consumer services industry only, show how companies compare in terms of ROE across
each of the three years from 2013 to 2015. HINT: Use the heat map feature in Tableau.
From the heat map, pick one company that stands out to you and explain why you chose it. Create
another data visualization for the company you selected to explain the company’s ROE performance
using the underlying ROE components (i.e., profit margin, asset turnover, and leverage).

4. Which company, within this consumer services industry, had the worst Days Sales Outstanding
(DSO) in 2013? Did the worst-DSO company improve its DSO during 2014 or 2015? If DSO
improved, describe specific changes that the company could have made to achieve this. If DSO
worsened, describe specific reasons to explain how this could have happened.
HINT: use a bar graph.
5. Companies that have negative profit margins but are increasing their asset turnover ratio are
“accelerating into a brick wall” (i.e., they are getting better at losing money). What three companies in
2015 are the worst in that they have a negative (or zero) profit margin and the highest asset turnover
ratio? Give the name of the company. HINT: Create a scatterplot to answer this question.