The DuPont identity is an expression that shows a company's return on equity (ROE) can be

represented as a product of three other ratios: the profit margin, the total asset turnover and
the equity multiplier. It is also commonly known as DuPont analysis, and it comes from the
DuPont Corporation which began using the idea in the 1920s.

The DuPont identity tells us that ROE is affected by three things:

1. Operating efficiency, which is measured by profit margin;

2. Asset use efficiency, which is measured by total asset turnover;

3. Financial leverage, which is measured by the equity multiplier.

If the ROE is unsatisfactory, the DuPont identity helps analysts and management locate the
part of the business that is underperforming.

The formula for the DuPont identity is:

ROE = profit margin x asset turnover x equity multiplier

This formula, in turn, can be broken down further to:

ROE = (net income / sales) x (revenue / total assets) x (total assets / shareholder equity)

he equity multiplier is an important factor in DuPont analysis, which is a method of financial

assessment devised by the DuPont Corporation for the purpose of internal review. The
DuPont model breaks return on equity (ROE) into its constituent pieces, which are popular
financial ratios and metrics. Net profit margin, asset turnover and the equity multiplier are
combined to calculate ROE, which allows analysts to consider the relative of each impact
separately. If ROE changes over time or diverges from normal levels for the peer group,
DuPont analysis indicates how much of this is attributable to financial leverage..

Financial analysis (also referred to as financial statement analysis or accounting analysis or

Analysis of finance) refers to an assessment of the viability, stability and profitability of a
business, sub-business or project.
It is performed by professionals who prepare reports using ratios that make use of
information taken from financial statements and other reports. These reports are usually
presented to top management as one of their bases in making business decisions. Financial
analysis may determine if a business will:

Continue or discontinue its main operation or part of its business;

Make or purchase certain materials in the manufacture of its product;
Acquire or rent/lease certain machineries and equipment in the production of its
goods;
Issue stocks or negotiate for a bank loan to increase its working capital;
Make decisions regarding investing or lending capital;
Make other decisions that allow management to make an informed selection on
various alternatives in the conduct of its business.

Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.):

Past Performance - Across historical time periods for the same firm (the last 5
years for example),
Future Performance - Using historical figures and certain mathematical and
statistical techniques, including present and future values, This extrapolation
method is the main source of errors in financial analysis as past statistics can be
poor predictors of future prospects.
Comparative Performance - Comparison between similar firms.

These ratios are calculated by dividing a (group of) account balance(s), taken from the
balance sheet and / or the income statement, by another, for example :

Net income / equity = return on equity (ROE)

Net income / total assets = return on assets (ROA)

Comparing financial ratios is merely one way of conducting financial analysis. Financial
ratios face several theoretical challenges:

They say little about the firm's prospects in an absolute sense. Their insights about
relative performance require a reference point from other time periods or similar firms.
One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least
two ways. One can partially overcome this problem by combining several related ratios to
paint a more comprehensive picture of the firm's performance.

Seasonal factors may prevent year-end values from being representative. A ratio's values
may be distorted as account balances change from the beginning to the end of an
accounting period. Use average values for such accounts whenever possible.

Financial ratios are no more objective than the accounting methods employed. Changes in
accounting policies or choices can yield drastically different ratio values.

Need for the study:

Financial statement analysis is used to identify the trends and relationships between
financial statement items. Both internal management and external users (such as analysts,
creditors, and investors) of the financial statements need to evaluate a company's
profitability, liquidity, and solvency. The most common methods used for financial
statement analysis are trend analysis, commonsize statements, and ratio analysis. These
methods include calculations and comparisons of the results to historical company data,
competitors, or industry averages to determine the relative strength and performance of
the company being analyzed.