Improvement And Application Study Of DuPont Analysis System

Maximizing shareholder’s wealth has been well recognized as the goal of corporate finance management with the development of social economy.Therefore,it’s essential to analyze the company’s profitability and growth-ability.Du Pont analysis system is an early and widely used tool for profitability analysis.Enterprises can understand their profitability,operational capability and solvency by Du Pont analysis.However,Du Pont analysis also has some limitations in practical application.This paper summarizes 6 limitations of the traditional Du Pont analysis system: 1.Data sources of ROA do not match.2.There is no distinction between operating activities and financing activities.3.There is no distinction between operating profits and OIOE;4.It lacks of attention on cost.5.It lacks of analysis of Cash Flow.6.It missing growth-ability analysis.Base on this,the paper below improvement on Du Pont analysis: taking sustainable growth rate as focus of new Du Pont system,distinguishing operation and financing activities,introducing CVP analysis and cash flow information,and distinguishing operating profits and OIOE.Considering that there are cases that Net Liabilities and Interest Expense after Tax are negative,the improved Du Pont system is detailed into 1 fundamental model and 3 sub models accordingly.Compared with the traditional Du Pont system,the improved Du Pont analysis system is more applicable in modern enterprises with complex business whose main strategy is cost leading and cash priority.The improved Du Pont analysis system not only can be used to analyze actual results,but also to forecast future estimation.It can be by external market investors to support decision making,but also by internal users for competitor’s benchmarking.This paper also applies the improved Du Pont analysis system in the 2013-2018 financial report analysis of Changhong Huayi and Midea Group.It shows that Changhong Huayi slow down the growth in recent years while Midea kept the growth rate.The improved Du Pont analysis shows that Changhong Huayi needs to reduce fix cost,review credit policy while maintain current strategy.Midea group can improve the utilization of the idle cash by increase the production capacity or acquisition or merger.