Let's begin by focusing on the DuPont Method. In academia, financial ratio analysis is often referred to as the DuPont model or method. Its origin stems from the work of an electrical engineer named F. Donaldson Brown, who joined the DuPont Company in 1914. DuPont, then and now, is a giant chemical company. Around the beginning of World War I, DuPont acquired 23 percent of General Motors Corp. (GM). At that time, GM was one of DuPont's largest customers.
General Motors was a huge conglomerate with a quagmire of financial issues. Brown came up with a way of measuring financial performance through the application of financial ratios. This process was the standard for financial managers until the early 1970s. Ratio analysis is still used today, but it has been supplemented with economic value added (EVA) and market value added (MVA) analysis. We discuss EVA and MVA in Chapter 5.
The key highlight on financial ratio analysis is to see how financial operations drive value. Some finance people refer to this model as the value drivers model; others, as the financial levers model. The former see value drivers as the explanation for how an entity makes money and increases its value, hence the term “value driver.” The latter view financial ratio analysis as the method for identifying the triggers of financial results, hence the term “financial levers.”
The differences between the two models are subtle and arguably an issue of semantics; nevertheless, both schools of thought ...