Financial analysis - ratio analysis.
DuPont analysis is a form of financial ratio analysis.
It is based on the insight that key financial ratios can often be broken down, in turn, into two or more component ratios.
Examining the component ratios, in turn, may yield further insights and opportunities for improvement.
For example, Return on Equity can be broken down into three components:
- Net profit margin;
- Asset turnover; and
Measuring and targeting different managers and corporate functions appropriately, can ensure that everyone is pulling in the same direction.
This consistency is sometimes known as goal congruence.
The ratios are sometimes set out in a pyramid-shaped diagram, with the analysis being known as the DuPont pyramid of ratios.