Question

The DuPont equation shows the relationships among asset management, debt management, and ratios. Management can use the DuPont equation to analyze ways of improving the firm's performance. Its equation is:

Answer 1

Return on equity (ROE) = profit margin × asset turnover × financial leverage

Explanation:

Return on equity (ROE) = profit margin × asset turnover × financial leverage

Which can be written as:

ROE = (net income÷ sales) × (sales ÷ total assets) × (total asset ÷ average shareholder equity)