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Financial analysis using DU- PONT ANALYSIS BY P. SAI PRATHYUSHA
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DEPARTMENT OF COMMERCE
DU- PONT ANALYSIS
PREPARED BY: P. SAI PRATHYUSHA
M.COM BUSINESS FINANCE
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A STUDY OF FINANCIAL PERFORMANCE USING DU-PONT ANALYSIS IN
THE FMCG SECTOR.
*** P. SAI. PRATHYUSHA, 1ST M.COM BUSINESS FINANCE, DEPARTMENT OF COMMERCE,
SCHOOL OF MANAGEMENT, PONDICHERRY UNIVERSITY.
In this study we can see how the Du-Pont Analysis is used to evaluate the financial
performance of a company. To use the Du-Pont Analysis there is a three-step model
followed where the net profit margin, the assets turnover ratio and the financial leverage
is used. To apply the Du-Pont analysis I have selected two companies from the FMCG sector
and I have calculated the ROI using the Du- Pont Analysis.
Performance evaluation of a company is usually related to how well a company can use its
assets and how well a company can generate profit by utilizing its assets. Performance
evaluations are one of the most important communication tools an organisation can use.
Performance evaluation benefits both the employee as well as the employer. It helps the
organisation in providing timely feedback, it recognises the quality performance of the
company and sets expectations for future.
Du Pont analysis is said to be an expression which breaks the Return on Investment (ROI)
into three parts. Du Pont analysis is one of the important tools for performance evaluation of
any company. For determining the financial position of a company and to know how well the
company performs its activities as well as the profitability and asset utilizing capacity of the
company, Du Pont analysis plays an important role.
Du Pont analysis easily measures return of equity related to the company for performance
evaluation. It analyses the company’s profitability and asset utilization. It measures overall
performance and efficiency of a company. This method is used to analyse companies past
financial performance and it also predicts the future trend of financial position.
The historical backgrounds of the two selected companies are as follows:
Nestle India Ltd:
Nestle India Ltd is one of the biggest players in the FMCG sector. The company is
mainly engaged in the food business. Nestle India Ltd was established in India in the
year 1956. The company has various segments and products such as milk products,
nutrition, beverages, chocolates, confectionary. The company manufactures products
of truly international quality under the internationally famous names such as
NESCAFE, MAGGI, KIT-KAT, BAR-ONE, MILKMAID and NESTEA. Nestle India is a
responsible organisation and facilitates initiatives that help in order to improve the
quality of lives in the communities where it operates. The culture of innovation and
renovation within the company gives it a distinct advantage.
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Britannia Industries Ltd:
It is an Indian food products corporation founded in the year 1892 and is one of India’s
100 most trusted brands. The company’s principal’s activity it to manufacture and sale
of biscuits,bread, rusk, cakes and dairy products.The company’s manufactures India’s
mostfavourite brands suchas Good day, Tiger, Nutri choice, Milk Bikis and Marie gold.
The company enjoys a large market share and is growing profitably. The company’s
revenue as of 2019 is Rs 10,672 crore (US $ 1.5 billion) with a market share of 38%.
The company’s sales grew at a compound annual rate of 16% and the operating profits
STATEMENT OF PROBLEM
The Return on equity (ROE) lacks the quality of financial analysis which is better explained
through Du-Pont analysis. Du- Pont analysis gains an advantage over the ROE due to the risk
analysis which can be done with the help of Return on Investment.
PURPOSE OF STUDY
The purpose of this study is to evaluate the performance of two FMCG companies in India by
measuring ROCE using the Du Pont analysis. The study analyses the financial conditions of
the selected two FMCG companies in India.
REVIEW OF LITERATURE
Liesz (1999), in his study states that determining the reason for failure of small firms
is troublesome and to analyse the reason for failure, Du Pont analysis can be used and he
also stated that the Du Pont analysis can be used to evaluate the performance of the company.
He stated that in case the company wants to know its performance level, it is required that the
company calculates the asset turnover, profit margin and the financial leverage. In his study
he has mentioned that these ratios help the company to know the reasons for its failure.
Muhammad (2006), in his study has mentioned that the ROA has an impact on the
profitability, efficiency and the operating decisions of a firm. This helps in planning and control
which in-turn increases the ROA. He has also mentioned that the Du Pont model shift from
the ROA to ROE has been modified to make it as a powerful tool for the strategic decision
making within the organisation to increase the ROE.
Maria Zain (2008), In his study he mentions that the return on asset is an important
factor and is also an indicator to dictate how well the assets are used to generate revenue. He
mentions that the higher return on asset indicated that the company’s asset utilization is not
good enough to generate the revenue.
Maranville (2008), in his study he mentions that there is Du-Pont model that has
combination of five ratios in order to determine the ROE. He also mentions that scrutiny of the
annual statements of a company alone are not sufficient and the company requires to also
look at the operating decision (profitability and efficiency) and financing decisions (leverage).
He says that according to the recent evidence it has been shown that the modified Du-Pont
analysis can be used to find the causes for financial problems.
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Rogova (2014), in his study has said that the Du Pont analysis helped in effectively
revealing the factors of efficiency. In his study he found that a strong advantage of ROE was
the possibility of its disaggregation into different profitability ratios, with ROE giving the
indication of the profitability and efficiency from the shareholder’s point of view.
OBJECTIVES OF STUDY
To understand the Du-Pont Analysis and the model used.
To know the financial performance of Nestle India Ltd and Britannia Ltd
To compare the financial performance of the selected companies using Du-Pont
analysis and see which company performs better among the two companies.
To study how Du-Pont analysis helps in evaluating the financial performance of the
DU- PONT DEFINITION
Du- Pont analysis is a tool used for evaluating the financial performance of a company by
calculating the Return on Investment (ROI) by breaking the components into three. The three
components used in the calculation are profit margin, Asset turnover, and the leverage factor.
When the components of ROI are broken, it helps the investors to examine how effectively a
company performs in each area. To find the ROI through Du- Pont analysis, one must find the
net profit margin, Assets turnover ratio and the financial leverage. When we multiply all the
three, we get the required ROI.
Du-PONT IS USEFUL FOR WHOM
There are four beneficiaries from the Du-Pont analysis.
It is useful for the company and it helps the business to understand how the segment
is contributing to the overall ROE of the company. In fact, this can be used as a reliable
indicator of the performance measurement of divisional managers.
For the top management, this can be useful in making decisions such as the capital
allocation. The capital has to be allocated to the business which contributes most of
the ROE of the company with minimal risk. Increasing the ROE by increasing the
leverage is not a good idea.
Du- Pont helps the analyst in tracking the stock to pin point the actual triggers that are
driving the performance of the company and whether these factors are useful or not.
This is what ultimately matters when it comes to valuation of the company.
Lastly and finally, the fund managers will take a decision on comparative investments
based on the ROE analysis. Over a longer period of time it is the ROE that drives
valuations and also the P/E ratio re- rating. That only happens when the ROE boost is
sustainable. That is exactly what the Du-Pont analysis captures.
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Du-PONT CONTROL CHART
The Du-Pont analysis can be better understood with the help of a Du-Pont control chart.
DU- Pont Control Chart
Return on Investment or Capital Employed
Net Profit Margin (as% of sales)
Total Assets turnover
Net profit after tax Net Sales Net Sales Total assets
Or capital employed
Net Sales +/-
surplus or deficit
Cost of Sales
Cost of Goods sold
Corporate income Tax
Current Assets Fixed Assets
Cash and Bank balance
Other current assets
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Methodology represents how the data is collected, analysed and used for the study. It is a
systematic and theoretical analysis of the methods applied to a field of study. It describes
about the DU- Pont decomposition and the formula used for measuring the financial
performance quantitative approach has been used in this study to obtain the results.
ROI has been calculated using the three step DU- Pont model and is explained below.
THREE STEP DU- PONT MODEL
ROI using Du-Pont analysis is calculated as follows:
This three-step Du- Pont analysis, gives the organisation information about the performance
of the company, the profitability of the company, the asset management of the company and
the leverage creation of the company.
The higher the ROI, the higher is the growth of the company.
NET PROFIT MARGIN (Step 1):
The Net Profit margin is the proportion of earnings of a company from its sales. This
will be different for different industries because the competitors play a role in the
earnings of a company and it has an impact on the earnings margin. This is the reason
why we should compare the profit margins only with its peer companies. The profit
margin gives a good sign of pricing strategy and growth of the company. The better
the profit margin, the better is the company. For increasing the profit margin, the
company should either increase its production or minimise the costs.
The formula used to calculate the Net Profit Margin is as follows:
ASSET TURNOVER (step 2):
The asset turnover ratio measures how the company earns from its assets. Generally,
a low margin company have high asset turnover because they rely more in increase in
sales rather than the additional cost incurred in the asset. On the other hand, high
margin company have low asset turnover because they invest more in the assets
rather than the increase in the sales.
The formula used to calculate the Asset turnover is as follows:
Whenwe multiplythe Net ProfitMarginand the assets turnover, we get the required ROI.
ROI= Net Profit Margin * Asset Turnover
NET PROFIT MARGIN= NET PROFIT/SALES
ASSET TURNOVER = SALES/ TOTAL ASSETS
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Calculations have been done using MS Excel and the tabular representation is done to present
To do the data analysis, secondary data has been collected. The data has been
collected from Bloomberg source. The two selected company’s (Nestle India Ltd and
Britannia Ltd) balance sheet and Income Statement as per GAAPhave been taken to do
the calculations. The data of 2 years (i.e., 2017-2019) have been collected to do the
DATA ANALYSIS AND INTERPRETATION
Return on Equity (ROE):
ROE is one of the basic tests that is used by the company in knowing how effectively a
company’s management usesthe money of the investors. It will help the investors to know
whetherthe managementisgrowingthe company’svalue atan acceptable rate by usingthe
moneyof the investors.Thisratioalsomeasuresthe rate of return that the firmearnson the
shareholder’s equity. The shareholders equity is the denominator in the formula used. This
ratio influences the amount of firm’s debt in using the finance assets.
The formula used to calculate the Return on equity (ROE) is as follows
Usingthe above formula,the ROE hasbeen calculatedforthe two selected companies(i.e.,
Nestle India Ltd and Britannia Ltd) and the calculations are below
ROE calculations using the Du- Pont analysis is below:
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ROE INTERPRETATION FOR NESTLE INDIA LTD:
As per the calculation done above, we can clearly see that Nestle India Ltd has a ROE
of 16.64% in the FY 2017-2018 and 19.87% in the FY 2018-2019. It is clear that the
ROE of the company has increased over the year by 3.23%.
The increase in the ROE of Nestle India Ltd shows that the investor’s money is put to
proper use by the management. A rising ROEsuggests that the company is increasing
its profit generation without needing much capital. An increase in the ROE also implies
that the company has increased its debt as we can see in the above table, the long-
term debt of the company has been increased from Rs 39,420 to Rs 44,143. So, this
means that the increase in the ROE by 3.23% is due to the increase in the long-term
debt by Rs 4,723.
ROE INTERPRETATION FOR BRITANNIA LTD:
As per the calculation done and shown above, we can see that ROE of Britannia Ltd
is 19.36% for the FY 2017-2018 and 18.57% for the FY 2018-2019. We can see that
there is a decrease in the ROE by 0.79%.
The decrease in the ROE of Britannia Ltd shows that the investors money is not put to
proper use by the management. The decrease in the ROE indicates that the company
is being mismanaged and that the company could be using the amount in reinvesting
the earnings into unproductive assets.
The decrease in ROE is only 0.79% which shows that there is consistency in using the
Return on Investment (ROI):
ROI is a performance measure that is used to evaluate the efficiency of an investment or
to compare the efficiency of a number of different investments. ROI tries to directly
measure the amount of return on a particular investment., relative to the investment’s cost.
The purpose of ROI is to measure, per period, rate of return on money invested in an
economic entity in order to decide whether to undertake an investment or not. It is also
used as an indicator to compare the different investment portfolio. The investment with
largest ROI is usually preferred.
The formula used to calculate the Return on Investment (ROI) is as follows
Using the above formula, the ROI has been calculated for the two selected companies (i.e.,
Nestle India Ltd and Britannia Ltd) and the calculations are below
ROI = Profit Margin * Assets Turnover
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ROI calculations using the Du- Pont analysis is below:
ROI INTERPRETATION FOR NESTLE INDIA LTD:
As per the calculations shown above, we can see that the ROI of Nestle India Ltd
is 35.82% in the FY 2017-2018 and 43.74% in the FY 2018-2019. We can clearly
see that there is an increase in the ROI of the company from FY 2017-18 to FY
2018-19 by 7.92%.
The increasein the ROIindicates that the company has utilized its assets in a good
As the company’s ROI is increasing over the year it is expected to increase in the
coming years and hence it is good to make an investment in this company.
ROI INTERPRETATION FOR BRITANNIA LTD:
As per the calculations shown above, we can see that the ROI of Britannia Ltd is
29.37% in the FY 2017-2018 and 27.04% in the FY 2018-2019. Wecan clearly see
that there is a decrease in the ROI of the company over the year by 2.33%.
The decrease in the ROI of the company over the year has indicated that the
company has not utilised its assets in a good way.
As the ROI has decreased over the year, the investors should take caution before
investing in the company.
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DU-PONT ANALYSIS OF THE SELECTED TWO COMPANIES USING
LIMITATIONS OF THE STUDY
There are some limitations of the Study. Du Pont analysis is used for performance evaluation
of the companies. When conducting the research some problems have been faced. For
evaluating performance have to choose a method that is appropriate. However, data should
be correct, otherwise calculation may be baffling. Sometimes the items to analyse could not
find appropriately as a result there may have some lacking in comparing among those
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There are some drawbacks of Du Pont decomposition also. Such as-
The DuPont identity is an accounting identity and this model relies on accounting data,
which can be altered by companies to hide short-term weaknesses (even though this
DuPont decomposition does not include the cost of capital.
How much increase of debt will determine the negative or positive return to
shareholders is not recognized by this disaggregation.
FINDINGS AND CONCLUSIONS
In the year 2017-2018, when we see the ROIand ROEof Nestle India Ltd and Britannia
Ltd, we can say that Nestle India Ltd has comparatively shown higher ratios when
compared to Britannia Ltd.
In the year 2018-2019, when we see the ROIand ROEof Nestle India Ltd and Britannia
Ltd, we can say that again Nestle India Ltd has comparatively shown higher ratios
when compared to Britannia Ltd.
Overall, Nestle India ltd has a higher ROIand ROE when comparedwith ROIand ROE
of Britannia Ltd.
This implies that Nestle India Ltd will be able to generate more returns to the
shareholders on their funds and more return on their assets when compared to
This indicates that the Nestle India Ltd company’s management is more efficient in
using the shareholder’s funds.
The low ratios of Britannia Ltd could be due to the increase in long term debts which
is not good for a company.
This analysis makes it easy for the investors to make their investment decision. It is
preferred that the investors invest in Britannia company because of its high returns that
ROI and ROE are tools used by companies and organisations to know the ability of their
performance. ROI helps the company and the shareholders in knowing how well it is using the
assets to generate the returns or revenue. ROE helps the company and the shareholders in
knowing how efficiently it is using the shareholder’s funds and how much returns they can give
back to their shareholders.
Higher ratios in ROI and ROE indicates better performance of the company and the
growth of the firm.
In this study, Nestle India Ltd has higher ratios in ROI and ROE when compared to
Britannia Ltd and the company also shows more consistency. Britannia Ltd also can
improve its performance by using the shareholders amount in a proper way.
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