Question

if we know that a firm has a net profit margin of 4.5%, total asset turnover of 0.72, and a financial leverage multiplier of 1.24, what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders divided by common stock equity?

Answer 1

a)ROE = Net profit margin *total asset turnover * financial leverage multiplier

         = 4.5 * .72 *1.24

        = 4.0176 %   (rounded to 4.02 %)

b)The advantage of using Dupoint system for calculation of ROE is that it expands ROE in to profitability ratio (measured by profit margin) ,operational efficiency (measured by asset turnover) and financial leverage or in other words it provides complete picture of company's financial position/health and performance which direct calculation fails to provide.