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