Chapter $18$ Du Pont System Of Ratio Analysis

$18\mathrm{.}1$ Basics

Problem. A company's Net Profit is $$170,$ Pretax Profit is $$260,$ EBIT is $$470,$ Sales are $$4,600,$ Assets are $$4,200,$ and Equity is $$4,300.$ Calculate the company's ROE and decompose the ROE into its components using the Du Pont System.

FIGURE $18\mathrm{.}1$ Excel Model of Du Pont System of Ratio Analysis $-$ Basics.

The ROE$=4\mathrm{.}0\%.$ The decomposition helps us see where this comes from. Here is an intuitive interpretation of the components:

Net Profit $\frac{?}{?}$ Pretax $=65\mathrm{.}4\%$ is a tax$-$burden ratio.

Pretax Profits $\frac{?}{?}$ EBIT $=55\mathrm{.}3\%$ is an interest$-$burden ratio.

EBIT $\frac{?}{?}$ Sales $=10\mathrm{.}2\%$ is the profit margin.

Sales $/$ Assets $=109\mathrm{.}5\%$ is the asset turnover.