The DuPont Identity

Many times ratios computed for a firm give a conflicting picture of performance. The DuPont Identity provides a way to breakdown ROE and investigate what areas of the firm need improvement.

The DuPont Identity indicates that a firm's return on equity depends on its operating efficiency (profit margin), asset use efficiency (total asset turnover), and financial leverage (equity multiplier).

Equity multiplier (EM) = TA/TE = 1 + debt/equity ratio

Based on the Du Pont identity,the following factors affect the growth rate:

- Profit margin

- Total asset turnover -

- Financial policy

- Dividend policy

Please explain how they affect the growth rate of a company.