Use and Misuse of Dupont Analysis in Business Valuation

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For many years, the Dupont analysis has been a popular tool to analyze the profitability of a business. By focusing on the building blocks of profitability – profit margin and asset turnover – the analysis can be extended to compute return on assets (ROA) and return on equity (ROE). While the profit margin and asset turnover ratios can be used effectively in analyzing a company's historical performance and evaluating its future potential, use of Dupont's ROA and ROE ratios can distort both performance and value. This article presents a review of the Dupont analysis and adjustments that must be made to it to achieve proper valuation conclusions.