Question

You are using DuPont method for analyzing a company’s increasing ROA over time. The firm’s profit margin is stable and expected to remain unchanged. In which situation could the increase of the other component of the ROA concern you? No calculations needed.

Answer 1

The Dupont analysis is a framework for analysing fundamental perfoemance popularized.

The simplest way to determine ROA is to take net income reported for a period and divide that by total assets..To get total assets, calculate the average of the begining and ending assets values for the same time period..

Return on Assets= Net Income / Total Assets

4 important points to increase ROA :

1) Increase net income to improve ROA

The entity could increase total sales for the period, then net income will increase accordingly.

2) Decrease the total assets to improve ROA

ROA is the ratio that assess the efficiency of using assets.In others it compares how much entity generates income from $1 of assets compare to other entities.

3) Improve the efficiency of current assets

An entity might make short term investments on cash to generate additional incomes.This will help ROA.

4) Improve the efficiency of fixed assets

Improve efficiency ratio using fixed assets could help the company increase its productivity or in other words, reduce operating cost related to fixed asstes.