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 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:

$\backslash$table$[[$ROE$,$Profit Margin,,$x,$Total Assets Turnover,$x,],[=,\_/$ Sales,$x,\_/$ Total Assets,$x,$Total Assets $/$ Total Common 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:

$\backslash$table$[[,$ROE,$=,$Profit Margin,$x,$Total Assets$],[,12\mathrm{.}0\%,57\mathrm{.}3\%,9\mathrm{.}8,$Equity Multiplier,$],[$Company A$,12\mathrm{.}5\%,58\mathrm{.}2\%,10\mathrm{.}2,2\mathrm{.}14,],[$Company B$,15\mathrm{.}5,10\mathrm{.}3,2\mathrm{.}61,,],[$Company C$,21\mathrm{.}5\%,58\mathrm{.}0\%,,3\mathrm{.}60,]]$

Referring to these data, which of the following conclusions will be true about the companies' ROEs?

The main driver of Company C$\text{'}$s superior ROE, as compared with that of Company A$\text{'}$s and Company B$\text{'}$s ROE, is its greater use of debt financing.

The main driver of Company C$\text{'}$s superior ROE, as compared with that of Company A$\text{'}$s and Company B$\text{'}$s ROE, is its operational efficiency.

The main driver of Company A$\text{'}$s inferior ROE, as compared with that of Company C$\text{'}$s ROE, is its higher total asset turnover ratio.