DuPont Analysis (04/11/2014)

DuPont Analysis (04/11/2014)

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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Comments

  1. I have used the DuPont analysis on occasion as well as a version which break ROE down even further down to the micro level by dissagregarting the drivers of return on net operating assets and financial leverage.

    As always, just calculating a ratio doesn’t necessarily explain anything unless you compare with other data. I think D/E is a useless ratio for instance unless you compare with interest coverage. The same goes for ROE, a company may have high ROE but looking under the hood you may find that it isn’t necessarilly indicative of what you would like in a quality company. In fact performance may have been decreasing with financial leverage making up the difference or improvement. If this is the case then the performance can only decline so much more before the finacnial leverage section becomes a problem.

    One of the many ways you can get a better picture of what is happening to a company.

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