ROE DuPont Analysis breakdown ROE into a function of different ratios to analyze imp profit margins leverage turnover on shareholder's returns ROE = Net income Equity ROE = Net income * total Assets return on assets (ROA) ROA ROE = Net income * sales net profit margin While you can calculate ROE given the components o If you gave net income and equity, you can calculate R The DuPont method is a way to decompose ROE, to b IF ROE is relatively low, it must be that at least one of The company has a poor profit ma The company has a poor asset tu The company has too little leverag Profit margin , an indicator of profitability. Shows how Turnover , an indicator of efficiency. Shows how many Leverage, an indicator of solvency. Shows how many
Example of calculation ROE = NPM * Turnover * Leverage To separate the effect of taxes and interest, we can further decompose the net profit margin: ROE = Net income * sales net profit margin ROE = Net income * EBT tax burden Higher taxes and higher interest decrease ROE Example effect of taxes on ROE, how much the company keeps out of pretax
ROE = tax burden * interest burden * EBIT margin * asset turnover * leverage a B tax burden 20/30 60/100 interest burden 30/35 100/100 Ebit margin 35/500 100/900 asset turnover 500/250 900/300 leverage 250/150 300/250 a B tax burden 0.67 0.60 interest burden 0.86 1.00 Ebit margin 0.07 0.11 asset turnover 2.00 3.00 leverage 1.67 1.20 ROE 13% 24% example
equitytotal assets turnoverof DuPont equations, this isn’t necessary if you have financial statements,ROEbetter see what changes are driving changes in ROEthe following is true:
sales * total Assets total Assets equity total assets turnover leverage EBT * EBIT EBIT sales interest burden EBIT margin effect of interest on ROE
- 0.07 0.14 0.04 1.00 - 0.47
1 2 3Based on this data, what is Chan least likely to conclude?
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- Fall '16