The fourth of the ten data analysis models: DuPont analysis model

In business operations and financial management, data analysis is a key tool for gaining insights into business performance and making strategic decisions. Among them, the DuPont analysis model, with its unique structure and profound logic, has become an important analytical framework for evaluating corporate profitability. This article will take you to an in-depth understanding of the construction ideas of the DuPont analysis model and explore its application in different business scenarios.

Many students face this problem at work:

• How to select key indicators?
• How to break down key indicators?
• How to ensure that effective conclusions can be output after disassembly?

If you master the construction ideas of the DuPont analysis model, the above problems can be easily solved. However, many popular online articles only list a lot of indicators when introducing the DuPont analysis model, which makes students dizzy and unable to understand the logic.

Today, Teacher Chen will lead everyone to unravel the mystery, understand the ideas behind the DuPont analysis model, and then expand its application.

1. Three times of disassembly to understand the underlying logic of the model

As an investor, how should I evaluate the ability of a company? The most intuitive idea is: if he uses my investment money to run the business, the more money he makes, the better! Therefore, the first indicator is ROE (Return on Equity). ROE = Net Profit/Equity, which directly reflects the company's ability to make money, and the higher the better.

But be careful! In addition to getting investment, companies can also borrow money. If they borrow too much money, the company will go bankrupt, and the investors' money will also be wasted. Therefore, the first decomposition is: ROE = ROA * equity multiplier, to distinguish between the company's operating ability and financial risk control ability (as shown in the figure below).

Business operations are related to two factors: profitability and turnover capacity.

Profitability is easy to understand: the profit margin of revenue. If the profit margin is too low, it means that the business is not profitable.

Turnover capacity can actually be simply understood as the speed of sales. For example, there are two products, A and B. Product A can earn 500 yuan per unit, but only one unit is sold in a year. Product B can earn 5 yuan per unit, but 1,000 units can be sold in a year. Everyone will definitely choose B. We often say: "small profits but quick turnover" means this. Therefore, we need to do a second disassembly (as shown below).

Through the second disassembly, we can see two basic business ideas of the enterprise:

• Small profits but quick turnover: low net profit margin, but fast asset turnover! Less profit per piece, but wins in large quantity and fast sales!
• High profit and slow sales type: The net profit margin is high, but the turnover is slow, and they may even deliberately withhold products from sale in order to maintain a high-end image and make more money!

If you want to further understand how to achieve small profits but quick turnover, you can do a third disassembly. Because:

• Net profit = income - cost - various expenses - tax
• Total assets = fixed assets + inventory + accounts receivable + cash

So we can further decompose it as follows:

After breaking it down, you can clearly see how money is made and how assets are used. For example:

• The sales department is responsible for the revenue, and mainly uses the channel fees for promotion/opening new stores.
• The merchandise department is responsible for introducing best-selling products and eliminating slow-selling products.
• The marketing department is mainly responsible for promotion, spending marketing expenses on promotion to increase sales

This breakdown can also remind us of some easily overlooked relationships (the red line in the figure above):

• Accounts receivable is mainly the responsibility of sales. If sales do not follow up, it is useless to rely on finance to worry.
• Marketing expenses should be considered in relation to cash. It is not uncommon for companies to burn out by spending money on promotion.
• R&D expenses should be linked to new product revenue, and whether the product is good needs to be tested by the market.

2. Advantages and disadvantages of DuPont analysis model

Advantage 1: It is very easy to draw conclusions by using one most critical main indicator for evaluation. There is a saying among stock traders: "If you don't know how to pick stocks, throw away those with ROE below 15% first!" Summarizing the complex business status of a company with one indicator is very effective.

Advantage 2: Indicator decomposition reflects business action strategies. No matter what products are sold or what business is done, there is always a choice: "Fight a price war with peers or go for differentiation". To fight a price war, you must sell at a low profit but high volume. To go for differentiation, you must choose a small and selective customer group to increase profits and slow down turnover. The second level of decomposition can effectively reflect business differences and thus guide business development.

Advantage 3: Each decomposition is assigned to a department responsible for the indicator. The first decomposition distinguishes the responsibilities of business and finance; the second/third decomposition distinguishes the responsibilities between business departments such as sales, marketing, and production. This decomposition method is easy to implement. Only when someone is responsible for the indicator can it truly drive the business.

Of course, the DuPont analysis method also has its shortcomings, namely: it uses financial indicators, which are updated slowly and cannot 100% adapt to flexible and changeable business forms. However, once we master the idea of ​​finding key indicators first, then breaking down business actions and implementing them in various departments, then it is no problem to build a small DuPont analysis model by ourselves.

3. Extended Application of the Model

Because financial accounting of cost, assets and other data is often done on a monthly/quarterly basis, the business department cannot wait for the financial results to come out, and will directly break down the indicators such as revenue/GMV to build a set of "Little DuPont Model" to guide the business. When breaking down the indicators, always remember that "someone will follow the indicators" so that they can be implemented.

For example, if a company uses physical stores as its main sales channel, it needs to further break down its revenue sources, then it must be based on stores. The classic way to break down is as shown in the figure below:

In this way, the indicators are broken down and followed up:

• The customer flow is not good, mainly due to the location selection problem, the channel department is responsible for follow-up
• The issue of average order value is mainly about products and marketing. The marketing department will follow up.
• The store manager is responsible for the storefront order/transaction rate, and the branch office is responsible for supervising the implementation

If it is an e-commerce company, users may log in naturally or through external advertising, so you should first distinguish the sources of traffic.

After disassembling it like this:

• The off-site traffic is not good, the promotion department is looking for ways to optimize the delivery
• The site is not active enough, the operation department finds ways to promote user activity
• If the deal is not going well, the merchandise department will try to find a way to optimize product combinations and launch activities.

Of course, if there are many channels, you can also combine the above two methods to disassemble them. As shown in the following figure: