Question

The return on equity (ROE) is an important ratio to investors. Discuss each part of the...

The return on equity (ROE) is an important ratio to investors. Discuss each part of the DuPont Identity as it relates to the ROE. Discuss the type of information that the DuPont Identity reveals compared to the ROE considered alone. What can increase or decrease the ROE?

Homework Answers

Answer #1

Du Point Identity- It tells how the return on equity (ROE) can be used in three other ratios: Profit margin, Total assets turnover and Equity multiplier. Du point analysis is a measure of performance of the company.

Formula: REO = Profit margin * Asset turnover * Equity multiplier

Parts of Du Point identity: Are as following-

Profit margin- This is a measure of operating efficiency. Its formula is:

Net Income / Sales

Asset Turnover- This is a measure of efficiency of assets. Its formula is:

Sales / Total Assets

Equity Multiplier- This is a measure of financial leverage. Its formula is:

Total Assets / Shareholder's equity

Information that the DuPont Identity reveals- It reveals the point which is affecting return on equity. It traces the cause why ROE is declining. It also tells the main driver that is increasing company's ROE.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
One. The famous Dupont Identity breaks Return on Equity (ROE) into three components: Profit Margin, Total...
One. The famous Dupont Identity breaks Return on Equity (ROE) into three components: Profit Margin, Total Asset Turnover, and Financial Leverage (Assets/Equity). French Corp. has an Asset/Equity ratio of 1.55. Their current Total Asset Turnover has recently fallen to 1.20, bringing their ROE down to 9.1% a) What is this firm's Profit Margin? B) If the company were able to improve its Total Asset Turnover to 1.8, what would be their new ROE? Two. Sousa, Inc., has Sales of $37.3...
Firm A has a return on Equity (ROE) equal to 24%, while firm B has an...
Firm A has a return on Equity (ROE) equal to 24%, while firm B has an ROE of 15% during the same year. Both firms have a total liabilities ratio (Total liabilities/Assets) equal to 0.8. Firm A has an asset turnover ration of 0.8, while firm B has an asset turnover ratio equal to 0.4. From this information, which of the two firms has a higher profit margin? Show calculations and profit margins for both firms. (Hint: Use Dupont equation)
in your own words, what does each measure that current ratio, debt to equity ratio and...
in your own words, what does each measure that current ratio, debt to equity ratio and Return on equity ratio would tell us about your company that is important to investors and creditors?
Calculate Return on equity (ROE), Return on assets (ROA), Net Profit Margin (NPM), Debt ratio, and...
Calculate Return on equity (ROE), Return on assets (ROA), Net Profit Margin (NPM), Debt ratio, and Total assets turnover for 2018 and 2019. Explain why ROE is lower in 2019 than in 2018 (explain in terms of each ratio in DuPont equation for ROE). Income Statements ($ in millions) Balance Sheets ($ in millions) 2018 2019 Assets 2018 2019 Sales Revenue $2,580 $2,865 Cash $70 $50 Less: Cost of goods sold $1,060 $1,500 Short-Term investments $35 $9 Less: Operating Expenses...
In the banking industry, the return on equity ratio or percentage is used to evaluate the...
In the banking industry, the return on equity ratio or percentage is used to evaluate the financial performance of a bank. Such information is extremely valuable to investors. Calculate the return on equity (ROE) for a sample of 20 banks for the year before the Sarbanes-Oxley Act was enacted. For the same sample of banks, calculate the ROE for the year following the enactment of the Sarbanes-Oxley Act. Then, answer the following questions: After the enactment of the Sarbanes-Oxley Act,...
The DuPont equation Corporate decision makers and analysts often use a particular technique, called a DuPont...
The DuPont equation Corporate decision makers and analysts often use a particular technique, called a DuPont analysis, to better understand the factors that drive a company’s financial performance, as reflected by its return on equity (ROE). By using the DuPont equation, which disaggregates the ROE into three components, analysts can see why a company’s ROE may have changed for better or worse and identify particular company strengths and weaknesses. The DuPont Equation A DuPont analysis is conducted using the DuPont...
The DuPont equation Corporate decision makers and analysts often use a particular technique, called a DuPont...
The DuPont equation Corporate decision makers and analysts often use a particular technique, called a DuPont analysis, to better understand the factors that drive a company’s financial performance, as reflected by its return on equity (ROE). By using the DuPont equation, which disaggregates the ROE into three components, analysts can see why a company’s ROE may have changed for better or worse and identify particular company strengths and weaknesses. The DuPont Equation A DuPont analysis is conducted using the DuPont...
Bank A has a Return on Equity (ROE) of 18.00% and a Return on Assets (ROA)...
Bank A has a Return on Equity (ROE) of 18.00% and a Return on Assets (ROA) of 2.00%. Bank B has a Return on Equity (ROE) of 19.80% and a Return on Assets (ROA) of 1.60%. Using this information, which is of the following is NOT possible? Group of answer choices Bank B has an equity multiplier of 12.38 Bank B has a profit margin of 24.00% and an Asset Utilisation Ratio of 5.60% Bank B has a profit margin...
Critically discuss how financial leverage can impact investors’ return on equity with regard to property investments...
Critically discuss how financial leverage can impact investors’ return on equity with regard to property investments under the market scenario with high inflation rate and high interest rate 60 words max
14. The DuPont equation Corporate decision makers and analysts often use a technique called DuPont analysis...
14. The DuPont equation Corporate decision makers and analysts often use a technique called DuPont analysis to understand and assess the factors that drive a company’s financial performance, as measured by its return on equity (ROE). Depending on the version used, the DuPont equation will deconstruct the firm’s ROE, its best measure of financial performance, into two or three important factors, or drivers. DuPont analysis can be conducted using either the traditional DuPont equation or the extended DuPont equation. The...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT