Question

2e: Interpret the DuPont Formula ratios by explaining if its four ratios are a valid substitute for the ratios in Q1a-1d above. Cite specifics.

DuPont Formula - ROE	13.3%	0.8%	12.7%
Profitability	2.9%	0.2%	2.8%
Efficiency	2.8	2.6	2.5
Leverage	1.6	1.8	1.8
ROE Check	13.3%	0.8%	12.7%
Compound Annual Growth Rates
Revenues	#DIV/0!	5.0%	10.2%
Gross profit	#DIV/0!	-14.0%	33.8%
Operating profit (EBIT)	#DIV/0!	-79.0%	449.0%
Total assets	#DIV/0!	12.5%	11.8%

Answer 1

DuPont analysis is a technique used to decompose the three components that drives return on equity (ROE)

The three metrics that drive return on equity (ROE) are Net Profit Margin, Asset Turnover Ratio and financial leverage i.e Equity Multiplier.

DuPont Formula:

Return on Equity = Net Profit Margin×Asset Turnover Ratio× Equity Multiplier

Net Profit Margin=Net Income/Revenue​

Asset Turnover=Revenue​Average Total Assets

Equity Multiplier= Average Total Assets​​/Average Shareholders’ Equity

Return on Equity = Net Income/Revenue​ X Revenue​Average Total Assets X Average Total Assets​​/Average Shareholders’ Equity

= Net Income/Average Shareholder's Equity