Strengths of the DuPont Model

The main advantage of the DuPont Model is its simplicity. It reveals how the key ratios link with each other to govern total financial performance. The model gives you a look into important drivers of financial performance such as cash flow to revenues and asset turnover. It also enables one to ask "what if" kinds of strategic questions that help to gauge what kind of impact implementing changes can have.

Types of "what if" questions that the model can handle are:

1. After the acquisition of a small competitor, what will the ROA and ROE be?

2. What will the proposed upgrade to a new customer ordering system be on ROE?

3. If inventory turnover improves after implementations stemming from a nine-month reengineering project, how much will improve ROA?

The DuPont model can be used to understand short-term performance and not long-term value. It is a strong screen to test for impacts to operational metrics, but not intrinsic value. In its unadjusted form (net income–based) it has less linkage to cash generation and is less indicative of value.