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Simplified Du Pont Analysis
Breaks down Return on Equity (ROE) into key components to identify performance drivers
➡️ Step-by-Step Flow:
1. Revenues
• Comes from core business activities
2. Total Costs
• Includes:
- Cost of Product
- Cost of Sales
- Admin Cost
3. Net Profit = Revenues - Total Costs
4. Profit Rate = Net Profit ÷ Revenues
→ Indicates profitability per dollar earned
5. Assets
• Current Assets:
- Cash
- Receivable
- Inventory
- Securities
- Other
• Fixed Assets:
- Land
- Buildings
- Equipment
Total Asset = Current Asset + Fixed Asset
6. Asset Turnover = Revenues ÷ Assets
→ Measures efficiency of asset use to generate sales
7. Equity Multiplier = Assets ÷ Equity
→ Indicates financial leverage
🔁 Final Formula: Du Pont ROE
ROE = Profit Rate × Asset Turnover × Equity Multiplier
✅ Interpretation Guide:
• High Profit Rate → Strong cost control or premium pricing
• High Asset Turnover → Efficient operations and use of machinery/space
• High Equity Multiplier → Higher leverage, risk/reward trade-off
Cable Factory Example:
- Profit Rate: Boost by reducing scrap rates
- Asset Turnover: Improve by optimizing line speed
- Equity Multiplier: Adjust via financing decisions
Tip: Use Du Pont to diagnose whether ROE is driven by operations, efficiency, or financial leverage.