Du Pont Equation Flashcards
DuPont Equation
(Profit Margin) x (TA Turnover) x (Equity Multiplier)= ROE
Profit Margin
Net Income/ Sales
TA Turnover
Sales/ TA
Equity Multiplier
TA/CE
Balance Sheet- Asset
Cash AR Inventories, Total CA Gross FA Less: Accum Depreciation, Net FA, Total Assets,,
Balance Sheet- Liabilities and Equity
AP NP Accruals, Total CL LT Debt Common Stock Retained Earnings, Total Equity, Total L & E,,
Current Ratio
Current Assets/ Current Liabilities Indicates to what extent claims of short-term creditors are covered by short-term assets
Quick Ratio
(Current Assets- Inv)/CL Inventories are typically the least liquid current assets, hence losses are most likely to occur on the sale of inventories in a bankruptcy
Inventory Turnover Ratio
Sales/ Inventory Want higher than ind avg Reasons: may have old inventory, or its control may be poor
Days Sales Outstanding
Receivables/ (Sales/360) Days b/w sales and when $ is received Want lower than industry average Reasons: The company collects too slowly and poor credit policy
Fixed Assets Turnover Ratio
Sales/ Net Fixed Assets Want higher than industry average
Total Assets Turnover Ratio
Sales/ Total Assets Want higher than industry average Reasons: excessive current assets (A/R and Inv)
Debt Ratio
Total Debt/ Total Assets Measures the percentage of funds provided by creditors
Times Interest Earned (TIE)
EBIT/ Interest Expense Measures the extent to which op income can decline before the firm is unable to meet its interest expense and face bankruptcy
Profitability Ratios
Profit Margin on Sales (PM) Basic Earning Power (BEP) Return on Total Assets (ROA) Return on Common Equity (ROE)
