DuPont Financial Ratio Analysis Using Logical Aggregation

Abstract

This paper presents a logic-based method for DuPont financial analysis of company's business performances. DuPont method is used to decompose Return on equity (ROE), as a basic performance measure, into profit, turnover, and leverage component. Logical aggregation is used to aggregate these components in order to model possible patterns that correspond to business models. Interpolative Boolean algebra is employed to translate logical models of patterns into the corresponding mathematical models. The obtained mathematical models can be used to calculate the level of fulfillment of the observed patterns. Further, we use pseudological aggregation to aggregate several desired patterns in order to create a criteria function used for investment decision making. The proposed approach is tested on the example of 18 companies from automotive industry.