QUESTION 1 – Du Pont Financial Analysis
1.1 Explanation of the Du Pont system
The Du Pont system breaks down return on assets (ROA) and return on equity (ROE) into their component drivers to help management identify the
sources of profitability and financial leverage. Formula What it
Component
measures
, Profit margin =
Net income /
ROA = Profit Margin × Sales
Total asset
ROA decomposition
Total Asset Turnover turnover = Sales
/ Total assets
(efficiency)
ROE = Profit Margin ×
Equity multiplier
Total Asset Turnover ×
= Total assets /
ROE decomposition Equity Multiplier
Equity (financial
or ROE = ROA × Equity
leverage)
Multiplier
Explanation:
ROA shows how efficiently the company uses its assets to generate profit, driven by both profit margin and asset turnover.
ROE shows the return to shareholders, which is magnified by the use of debt (equity multiplier). The Du Pont framework helps management
pinpoint whether poor performance is due to low profitability, inefficient asset use, or suboptimal leverage.
1.2 Total asset turnover
Given:
Profit margin = 7% = 0.07
ROA = 25.2% = 0.252
Total Asset Turnover = ROA ÷ Profit Margin
Formula:
= 0.252 ÷ 0.07
= 3.60 times
Answer: Total asset turnover = 3.60 times
1.1 Explanation of the Du Pont system
The Du Pont system breaks down return on assets (ROA) and return on equity (ROE) into their component drivers to help management identify the
sources of profitability and financial leverage. Formula What it
Component
measures
, Profit margin =
Net income /
ROA = Profit Margin × Sales
Total asset
ROA decomposition
Total Asset Turnover turnover = Sales
/ Total assets
(efficiency)
ROE = Profit Margin ×
Equity multiplier
Total Asset Turnover ×
= Total assets /
ROE decomposition Equity Multiplier
Equity (financial
or ROE = ROA × Equity
leverage)
Multiplier
Explanation:
ROA shows how efficiently the company uses its assets to generate profit, driven by both profit margin and asset turnover.
ROE shows the return to shareholders, which is magnified by the use of debt (equity multiplier). The Du Pont framework helps management
pinpoint whether poor performance is due to low profitability, inefficient asset use, or suboptimal leverage.
1.2 Total asset turnover
Given:
Profit margin = 7% = 0.07
ROA = 25.2% = 0.252
Total Asset Turnover = ROA ÷ Profit Margin
Formula:
= 0.252 ÷ 0.07
= 3.60 times
Answer: Total asset turnover = 3.60 times
