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DuPont Formula (ROE) | Example | How to Calculate DuPont For ROE? - YouTube
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hello everyone hi welcome to the channel
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clicking the bell icon friends today we're
going to learn a important part of the
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ratio analysis which is called a dew
point formula the dew point formula for
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ROE that's what we are supposed to
discuss here as you can see the du-
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pont formula is basically the profit
margins that you make into the total
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asset turnover into the leverage factor
I think things didn't go in your brain
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no issues
we can we can solve this out
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close enough to in 1920s that DuPont
corporation it was the DuPont
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corporation that came up with this
formula and they named it as the
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DuPont roe
II the DuPont roe formula and this
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formula helps us to understand the ROE
in detail so the formula of the return
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on equity as for the DuPont
corporation okay is what we just
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learned over here the profit margin the
total asset turnover and the leverage
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factor no-issues let's understand this
with the help of an example let's say
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there's this company called Sutra and
company which has some following details
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it has the net income for the year as
50,000 the revenue for the year as
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3,00,000 the total assets under management let's say of the company is $9,00,000
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the shareholders equity
is let's say $1,50,000
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using the DuPont formula we will get
some some details something like this
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but before that we need to copy down the
formula so that we have some clear idea
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so this is a formula profit margin asset
turnover and the leverage ratio right so
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we'll start the return on equity that is
your r o e is equal to your profit
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margin as a turnover and leverage ratio
or the DuPont ROE right which can be
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also this can be also be written as your
net income divided by the revenues
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that's your sales into
the revenues the asset turnover is
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basically your revenue or sales divided
by the total assets and the next thing
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that we have is the leverage ratio so
the leverage ratio is basically your
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total assets
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/ the shareholders
equity so this is going to be your
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leverage ratio and this is of the whole
formula has been divided so
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roe will go something like this
the net income that is a 50,000 divided
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by the revenue that is 30,000 so we got
our first answer that is the profit
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margin over here as 0.166
we'll divide the revenue divided by our
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total assets right so 0.33
and the last that is the leverage ratio
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that is the total assets divided by the
shareholders equity and we'll multiply
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all of this three so as to receive the
roe as our answer so our answer is
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going to be we'll be multiplying all
these three components so our answer is
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33% so the
roe DuPont formula that we just
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analyze is 33%or 33.33
three so if you directly find out the
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return on equity we will get something
like this over roe that's the direct
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formula roe is equal to your net income
because the rest gets cut out I mean
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shareholders equity so our net income is
going to be 50,000 divided by the
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shareholders equity 1,50,000 so our
answer remains again the same 33 33
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okay so this is basically the DuPont
formula that's why the things are on the
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we have to go on the expanded version
how exactly the formula got incorporated
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now we'll take a real-life example of
Colgate for DuPont roe this is the dew
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DuPont ROE for Colgate in the DuPont formula example we calculated the
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DuPont ROE for Colgate over here
the return on owner's equity or the our
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ROE has been calculated right in front of
us this is the formula and as for the
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DuPont this is the answers the
answers absolutely remains the same as
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we have already discussed but the three
factors that we that are supposed to be
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taken is the profit margin the asset
turnover and the financial leverage now
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over here the net income is taken after
the the profit margin for profit margin
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the net income this portion is taken
after the minority shareholders payment
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and therefore the shareholders equity
consists of only share hold over here it
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consists of only equity or the common
shareholders of the Colgate and not
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including the minority holders now in
case of the asset turnover has been
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declining over the 72 over the past
seven to eight years in 15 145 139 140
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130 and it is reducing to 126 in
addition to the Colgate's profit margin
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have also declined over the past couple
of years as you can see however the
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return on equity that is the ROE has
not shown a declining trend as you can
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see 9390 and then after it has moved on
to 108 99.7 126 and so on and so forth
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so this is because of the equity
multiplier now what is the SEC the
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equity multiplier that we are talking
about over here is basically your total
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assets divided by your total equity
this is your equity multiplier and we
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note that the equity multiplier has
shown a steady increase over the past
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5 years and it's currently standing
at 30x
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now let's go to the explanation part of
the DuPont formula now if you Bay if we
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break down the formula we'll be able to
make sense how it exactly it works see
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the first component of the formula is
the net profit margin that's the first
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part if we look at the formula of the
profit margin it would be something like
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this the net income divided by your
revenues right the second component in
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the formula is the total asset turn over
if you look at the formula the total
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asset turnover would be revenue or the
sales divided by the total assets
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and the third component the third-most
component is basically your equity
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multiplier
which is if we look into the formula of
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the leverage factor we would get as the
total assets
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/ these shareholders
equity
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so now if you put these three components
in the DuPont formula determined will
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get
the return on equity this way it's it's
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what we just discussed roe the profit
multiplier in duty this is what we will
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sub we'll get the ROE you margins the
asset turnover and so on and so forth
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right and so or you can say the ROE /
the net income divided by revenue can
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also write this as
this week
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right so this is the way you can write
the magic of the particular formula is
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when we multiply this three ultimately
we get what as the net income divided by
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the shareholders equity right however if
we look at each we would be able to
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understand the total 4 ratios
together the first we will get to know
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how I mean to know what the
profitability of the company is second
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we'll be able to understand how
efficiently the company has been
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utilizing its assets third how much
companies leverage or how much leverage
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a company has been getting and the
fourth most important we'll also
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understand the return on equity overall
so in return on equity formula we are
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not only including the common shares we
are also taking into account the
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preference shareholders for the
preference shares the dividend if any
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into account the shareholders equity
basically means that we will take the
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whole statement and the total figures at
the end
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the use of the formula is that DuPont
formula helps us to save time and effort
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and the simultaneously they would be
able to understand how efficiently
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accompanies utilizing its resources and
how leverage the company is second the
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ROE definitely throws the light on the
proportion between the net income and
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the shareholders equity so it does not
allow us to understand how much the
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profitability our firm has and how for
the firm has been utilizing its assets
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and the third most important with the
DuPont you can calculate all or all
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you need to do is just look at it into
the income statement in the balance
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sheet and the shareholders equity
statement so that's it for this
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particular topic if you have learned and
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