7. The DuPont equation

Corporate decision makers and analysts often use a particular technique, called a DuPont analysis, to better understand the factors that drive a companys 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 companys ROE may have changed for 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 companys ROE. Complete the following equations, which are needed to conduct a DuPont analysis:

A DuPont analysis is conducted using the DuPont equation, which helps to identify and analyze three important factors that drive a companys ROE. Complete the following equations, which are needed to conduct a DuPont analysis:

ROE Profit Margin Total Assets Turnover / Total Assets / Sales Total Assets / Total Common Equity ROE Profit Margin Total Assets Turnover / Total Assets / Sales X mon Equity Retained Earnings Most investors and analysts in the financial community pay particular attention to a company Equity Multiplier le calculated simply by dividing a firm's net income by the firm's shareholder's equity, and it can be subdivided into the key fa 1. Investors and analysts focus on Return on Assets these drivers to develop a clearer picture of what is happening within a company. An analyst data and calculated the various terms of the DuPont equation for three companies: ROE Profit Margin Total Assets Turnover / Total Assets / Sales Total Assets / Total Common Equity Net Income Most investors the financial community pay particular attention to a company's ROE. The ROE can be calculated simply by dividing a firm's net incon Net Sales 5 shareholder's equity, and it can be subdivided into the key factors that drive the ROE. Investors and analysts focus on these drivers to arer picture of what is happening within a company. An analyst gathered the following data and calculated the various Gross Profit terms of the DL for three companies: ROE Profit Margin Total Assets Turnover / Sales X / Total Assets X Total Assets / Total Common Equity Sales Most investors and analysts in the financial commu ular 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 Net Income subdivided into the key factors that drive the ROE. Investors and analysts focus on these drivers to develop a clearer picture of what thin a company. An analyst gathered the following data and calculated the various EBIT terms of the DuPont equation for three companies 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: ROE X Total Assets Turnover Equity Multiplier Profit Margin 57.3% Company A 12.0% 9.8 2.14 Company B 15.5% 58.2% 10.2 2.61 Company C 21.5% 58.0% 10.3 3.60 Referring to these data, which of the following conclusions will be true about the companies' ROES? The main driver of Company C's superior ROE, as compared with that of Company A's and Company B's ROE, is its greater use of debt financing. The main driver of Company A's inferior ROE, as compared with that of Company C's ROE, is its higher total asset turnover ratio. The main driver of Company C's superior ROE, as compared with that of Company A's and Company B's ROE, is its efficient use of assets