21.4: DuPont Analysis

Question 1

DuPont analysis - …

Answer 1

An approach to decomposing return on investment, e.g., return on equity, as the product of other financial ratios.

Question 2

DuPont analysis can be expressed in 3 different decomposition steps:

Answer 2

2 step, 3 step, 5 step

Question 3

2-step ROE Decomposing:

Answer 3

Simple:
ROE = ROA × Leverage

**ROE = (NI / AvgEq) = (NI / AvgTA) * (AvgTA / AvgEq)

Question 4

3-step ROE Decomposing:

Answer 4

Simple:
ROE = Net profit margin × Total asset turnover × Leverage

**ROE = (NI / Rev) *(Rev / AvgTA) * (Rev / AvgTA) * (AvgTA / Eq)

Question 5

3. 5-step ROE Decomposing (To separate the effects of taxes and interest):

Answer 5

Simple:
ROE = Tax burden × Interest burden × EBIT margin × Total asset turnover × Leverage

**ROE = (NI / EBT) * (EBT / EBIT) * (EBIT / REV) * (REV / AvgTA) * (AvgTA / Eq)