How to analyse profitability: DuPont® system, EBITDA and earnings quality

The DuPont® system enables you to examine a firm’s financial statements to determine what, if anything is causing return on equity to fall short of expectations. In this tool, learn more about the DuPont® system and how return on equity is simultaneously affected by cost control, sales and leverage.

The DuPont® system can come in several forms.  It is a form of analysis that breaks down return on equity (or other ratios) into multiple component ratios.  These ratios provide greater insight into underlying factors that driving a firm’s results.

This system shows how leverage, cost control, profit margins and asset turnover affect return on equity.  In addition, the tool gives examples of how the system can be applied to return on assets, operating return on assets and how the system can be combined in a complete analysis pulling together different ratios.

In addition to examining the DuPont® system, the tool explores elements of earnings quality.  The quality of a company’s earnings depends upon two things. The first is a company’s perceived ability to continue earning profits at current levels or better. The second aspect of earnings quality is the relation of earnings to cash flow. Learn about important factors that lead to good earnings quality.