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Investment Basics: XXXIV. The Du Pont Identity

Investment Basics: XXXIV. The Du Pont Identity Colin Firer Graduate School of Business Administration, University of the Witwatersrand, Johannesburg No individual ratio provides an adequate assessment of all where PBIT = profit before interest and tax (operating aspects of a firm's financial health. In this note a profit) systematic approach to financial ratio analysis is intro­ I = interest charge on income statement duced. It was first used by the Du Pont Chemical T% = taxation charge on income statement/ Corporation in the U.S. at the turn of the century. PBIT After a little algebraic manipulation : The Du Pont system is a financial analysis and planning tool which uses basic accounting relationships. It is ROE = PBIT X _§__ X PBIT -I X (1- T%) X (12 + 0 1) [2] designed to provide an understanding of the factors that S NA PB/T E drive the return on equity of the firm. It may be represented Operating x Asset x Interest x Tax. x Equity by a flow chart in which return on equity is progressively profit margin Turnover effect effect multiplier decomposed until specific income statement and balance sheet items are reached. where D = book value of interest bearing debt The analysis is http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Investment Analysts Journal Taylor & Francis

Investment Basics: XXXIV. The Du Pont Identity

Firer, Colin
Investment Analysts Journal , Volume 26 (44): 3 – Jun 1, 1997
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Publisher
Taylor & Francis
Copyright
© 1997 Taylor and Francis Group, LLC
ISSN
2077-0227
eISSN
1029-3523
DOI
10.1080/10293523.1997.11082369
Publisher site
See Article on Publisher Site

Abstract

Colin Firer Graduate School of Business Administration, University of the Witwatersrand, Johannesburg No individual ratio provides an adequate assessment of all where PBIT = profit before interest and tax (operating aspects of a firm's financial health. In this note a profit) systematic approach to financial ratio analysis is intro­ I = interest charge on income statement duced. It was first used by the Du Pont Chemical T% = taxation charge on income statement/ Corporation in the U.S. at the turn of the century. PBIT After a little algebraic manipulation : The Du Pont system is a financial analysis and planning tool which uses basic accounting relationships. It is ROE = PBIT X _§__ X PBIT -I X (1- T%) X (12 + 0 1) [2] designed to provide an understanding of the factors that S NA PB/T E drive the return on equity of the firm. It may be represented Operating x Asset x Interest x Tax. x Equity by a flow chart in which return on equity is progressively profit margin Turnover effect effect multiplier decomposed until specific income statement and balance sheet items are reached. where D = book value of interest bearing debt The analysis is

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Investment Analysts Journal – Taylor & Francis

Published: Jun 1, 1997

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