Working with Financial Statements

Working with Financial Statements

1. The Du Pont Identity

   • Popular expression breaking ROE into three parts
     • 1. Operating efficiency (as measured by profitmargin)
     • 2. Asset efficiency (as measureby total asset turnover)
     • 3. Financial leverage (as measured by equity multiplier)
   • If ROE (Return On Equity) is unsatisfactory, then the Du Pont identity tells you where to start looking for the reasons
   • An expanded Du Pont analysis
     • The advantage of the extended Du Pont charts is that it lets us examine several ratios at once
     • Du Pont can increase its ROE by increasing sales and by reducing one or more of these costs.