Financial Ratio Analysis



THE DU PONT SYSTEM

The Du Pont system is a financial analysis system that has achieved international recognition. Du Pont brought together the key financial ratios in a logical presentation to assist management in measuring their return on investment (ROI). The system shows the various components affecting ROI, such as net income, fixed and current assets, and the most important figures appearing on the income statement and the balance sheet.

The figures in the upper portion of the Du Pont system deal with balance sheet and income statement items, and show how current assets, such as cash, inventory, and accounts receivable and fixed assets, are employed. To obtain the total assets turnover, sales are divided by total assets.

The figures in the lower portion of the system deal with income statement items. They give the income performance in relation to sales. By multiplying the total assets turnover by the income as a percentage of sales, we obtain the return on investment figures.

Eastman's ROI was calculated by multiplying the 1.4 total assets turnover by the 8.4 profit margin on sales. This gives an 11.7% ROI performance. If the company wants to increase this ratio, it may have to improve the fixed assets turnover ratio and/or the profit margin on sales.


Financial ratio analysis



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