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Dupont Method: The profit margin ratio is the only ratio that makes up ROE that can be negative (except in relatively rare cases).

Dupont Method:

The profit margin ratio is the only ratio that makes up ROE that can be negative (except in relatively rare cases).

Describe how the interpretation of the Asset Turnover Ratio (Sales / Total Asset) and the Financial Leverage Ratio (Total Asset / Shareholder's Equity) change based on whether the Profit Margin Ratio is positive or negative.

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In the Dupont Method, three major ratios are identified which can affect the ROE i.e. Return on Equity. Profit margin shows... View the full answer

2 comments
  • i am asking how the asset turnover ratio and financial leverage ratio should be interpreted when the profit margin is negative and positve. your answer is not addressing my question.
    • royze.lee
    • Apr 02, 2018 at 6:59am
  • When the sales is high , the asset turnover ratio is also high that suggest assets efficiency in terms of generate more revenue which result in positive profit margin while low turnover means low revenue which affect profit negatively. In case of Financial leverage , when leverage ratio is high means company using debt to financing assets which cause so this bring down net profit as company have to pay interest and principal amount. So this affect profit negatively while the favorable leverage affect profit positively.
    • SonalNaik
    • Apr 02, 2018 at 8:20am

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