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- Explain how the Du Pont System can help the analyst?
answer
The Du Pont System helps the analyst see how the firm’s decisions and activities over the course of an accounting period interact to produce an overall return to the firm’s shareholders. <P>By reviewing the relationships of a series of financial ratios, the analyst can identify strengths and weaknesses as well as trace potential causes of any problems in the overall financial condition and performance of the firm.</P>
<P>The ratios which are looked at include the return on investment (profit generated from the overall investment in assets) which is a product of the net profit margin (profit generated from sales) and the total asset turnover (the firm’s ability to produce sales from its assets). Extending the analysis the return on equity (overall return to shareholders, the firm’s owners) is derived from the product of return on investment and financial leverage (proportion of debt in the capital structure). Using this system, the analyst can evaluate changes in the firm’s condition and performance, whether they are indicative of improvement or deterioration or some combination. The evaluation can then focus on specific areas contributing to the changes.</P>
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