Explain in detail Assess the purpose of using the DuPont system for analysis. Explain how the factors in the DuPont equation influence the ROA equation
The Du-pont analysis is the assessing the Return on Equity of the whole company through the analysis of the overall performance. We can divide the performance of the company mainly under three important measure which are :
- The profitability margin of the company. It is being measured by the Net profit ratio
- The more effective usage of the assets to generate the sales of the company which we calculate through the Assets turnover ratio.
- The use of leverage to enhance the company assets so that the equity shareholders got the maximum benefits.
- Thus, in a nut cell the formula to assess the Return on Equity grow up by combination of all above measuring ends. Return on Equity = Net Profit Margin * Assets turnover ratio * The financial usage ratio to generate assets.
- The mathematical formula get constructed is :
Return on Equity = Net Income / Sales turnover * Sales turnover / Total Assets * Total Assets / Total Equity
The Du-Pont analysis main part is he Return on assets which comes by (Net Profit Margin * Assets turnover ratio) which comes up when effectively Financial leverage has been used to enhance the return on equity shareholders. So, it is the return on the assets which is being assessed under the Du-Pont analysis. Higher the Financial leverage ie. Creation of assets , must be accompanied by Higher return on the Assets so created. So, we can say that Return on Equity = Net Income / Total Assets * Total Assets / Total Equity, is the more effective part of the analysis