Question

2. What can you learn about a firm by using the Du Pont identity that you cannot determine by just knowing the return on equity?

Answer 1

DuPont identity provides us with ROE rate. However it also throws light on the operational efficiency and other aspects of the firm which cannot be adjudged based solely on the ROE.

The formula for the DuPont identity is:

ROE = profit margin x asset turnover x equity multiplier

Thus we can use the identity to further explore the sectors and improve the ROE as needed:
Profit margin can be used to increase net income
Asset turnover will help to utilize assets in a better way and efficiently
Equity multiplier reflects the amount of assets per shareholder equity and can be used to have an efficient rato of assets to equity