DuPont analysis

STEP: $1$ of $2$

In the extended DuPont equation, a firm's ROE reflects $(1)$ its use of debt financing, or leverage, as reflected by its

$(2)$ the efficiency with which it uses its assets, as measured by the

$,$ and $(3)$ its ability to generate sales and manage

its production costs and operating expenses, as summarized by its

r$.$

In contrast, in the traditional version of the equation, the firm's efficiency and profitability metrics are multiplied and summarized in a single measure,

the

$.$ In this analysis, a company's financial performance is expected to result from both management's financing

decisions and its effectiveness and efficiency in generating profits using the firm's asset base.