UGM June 2019 Q31

0. The DuPont approach breaks down the earnings power on the shareholders’ book value (RoE) as:

  • Option : A
  • Explanation : DuPont analysis is a way to view how a company manages the profit margin, total asset turnover, and the equity multiplier to generate the ROA and ROE. DuPont Analysis was first developed by the management team of the DuPont Corporation, hence the name. The benefit of this approach is that it gives greater detail by showing which key areas impact ROA and ROE and helps the management team analyze different ways to improve the performance of the corporation. In its bask form the DuPont equation is as
    ROA = Net Profit Margin × Total Asset Turnover follows:
    To get ROE from ROA we need an equity multiplier. This multiplier is equal to the ratio of total assets to common equity. Then the product of ROA and this multiplier give ROE:
    ROE = ROA × Equity Multiplier
    =ROA×Total Assets ⁄ Common Equity
    We can further combine the last two formulas to obtain an extended version of the DuPont equation: ROE = Profit Margin × Total Assets Turnover × Equity Multiplier
    = Net Income ⁄ Sales×Sales ⁄ Total Assets×Total Assets ⁄ Common Equity
Cancel reply

Your email address will not be published. Required fields are marked *


Cancel reply

Your email address will not be published. Required fields are marked *