The next analysis is the Du Pont identity which helps investors better understand the firms performance within the industry. The Du Pont identity is calculated by breaking ROE in three parts: operating efficiency, asset use efficiency, and financial leverage of the firm.

ROE = Profit margin x Total asset turnover x Equity multiplier

Profit margin measures operating efficiency, total asset turnover measures asset use efficiency, equity multiplier measures financial leverage. Lower ROE may be the result of weakness in operating efficiency or asset use efficiency. Du Pont identity decomposes ROE into three components and diagnose which part may be the cause of low ROE.

Calculate the Du Pont identity for the Prufrock Corporation using the tables referred to in question 2 of this discussion assignment and provide a concise interpretation.

Please show the steps. Thank you.

Balance Sheets as of December 31, 2018 and 2019 (\$ in millions) 20182019 Assets Current assets Cash Accounts receivable Inventory Total \begin{tabular}{rrrr} $84 & & 98 \\ 165 & & 188 \\ 393 & & 422 \\ \hline$642 & & $708 \\ \hline \end{tabular} Fixed assets Net plant and equipment $2,731 $2,922 otal assets $,373 $3,630 Liabilities and Owners' Equity Current liabilities Accounts payable Notes payable Total Long-term debt Dwners' equity Common stock and paid-in surplus Retained earnings Total $500$510 Total liabilities and owners' equity $2,2991,799 $3,373 2,115 $2,625 $3,630 Balance Sheets as of December 31, 2018 and 2019 (\$ in millions) 20182019 Assets Current assets Cash Accounts receivable Inventory Total \begin{tabular}{rrrr} $84 & & 98 \\ 165 & & 188 \\ 393 & & 422 \\ \hline$642 & & $708 \\ \hline \end{tabular} Fixed assets Net plant and equipment $2,731 $2,922 otal assets $,373 $3,630 Liabilities and Owners' Equity Current liabilities Accounts payable Notes payable Total Long-term debt Dwners' equity Common stock and paid-in surplus Retained earnings Total $500$510 Total liabilities and owners' equity $2,2991,799 $3,373 2,115 $2,625 $3,630