6. The DuPont equation Aa Aa Corporate decision makers and analysts often use a particular technique, called a DuPont analysis, to better understand the factors that drive a company's financial performance, as reflected by its return on equity (ROE). By using the DuPont equation, which disaggregates the ROE into three components, analysts can see why a company's ROE may have changed for the better or worse, and identify particular company strengths and weaknesses The DuPont Equation A DuPont analysis is conducted using the DuPont equation, which helps to identify and analyze three important factors that drive a company's ROE. Complete the following equations, which are needed to conduct a DuPont analysis: ROE Net Profit Margin x Total Assets Turnover x Total Assets Sales Total Assets Stockholders' Equity Most investors and analysts in the financial community pay particular attention to a company's ROE. The ROE can be calculated simply by dividing a firm's net income by the firm's shareholder's equity, and it can be subdivided into the key factors that drive the ROE. Investors and analysts focus on these drivers to develop a clearer picture of what is happening within a company. An analyst gathered the following data and calculated the various terms of the DuPont equation for three companies: Company A Company B Company C ROE 12.0% 15.5% 21.5% Net Profit Margin x Total Assets Turnover x Equity Multiplier 9.8 10.2 10.3 57.3% 58.2% 58.0% 2.14 2.61 3.60 Referring to these data, which of the following conclusions will be true about the companies' ROEs? O The main driver of company C's superior ROE, as compared to that of company A's and company B's ROE, is its greater use of debt financing O The main driver of company C's superior ROE, as compared to that of company A's and company B's ROE, is its efficient use of assets O The main driver of company A's inferior ROE, as compared to that of company B's and company C's ROE, is its use of higher debt financing