Question

Corporate decision makers and analysts often use a particular technique, called a DuPont analysis, to better understand the factors that drive a companyâs financial performance, as reflected by its return on equity (ROE). By using the DuPont equation, which disaggregates the ROE into three components, analysts can see why a companyâs ROE may have changed for the better or worse, and identify particular company strengths and weaknesses. The DuPont Equation A DuPont analysis is conducted using the DuPont equation, which helps to identify and analyze three important factors that drive a companyâs ROE.

Required:
What factors directly affect a companyâs ROE?

Answer 1

DuPont Equation

The three factors that directly affect a company's ROE (Return on Equity) are:

1. Profit margin

2. Total asset turnover

3. Equity multiplier

Step-by-step explanation:

The profit margin measures the operating efficiency of the company with higher sales leading to higher profit margins.

The total asset turnover is a financial measure that divides turnover by the total assets. It shows the efficiency achieved in the use of assets to generate sales revenue.

The equity multiplier measures the financial leverage of the company. It shows how the use of debts increases the value of the company's equity.