Question

DuPont Analysis of Return on Equity

1. Using the following table, calculate the ROE in each year using the simple formula.

2. Use the three step DuPont ROE process and show your work.

3. Summarize the findings in your DuPont ROE analysis.

Select Financial Data for ABC Corp.
	2017	2018	2019
Sales	20,000	22,000	25,000
Net Income	1,000	1,500	1,600
Total Assets	20,000	20,000	30,000
Total Equity	15,000	16,000	15,000

Answer 1

Particulars	Year 2017	Year 2018	Year 2019
Sales	20,000	22,000	25,000
Net Income	1,000	1,500	1,600
Total Assets	20,000	20,000	30,000
Total Equity	15,000	16,000	15,000
Ans 1.
Simple ROE =Net Income /Total Equity	6.67%	9.38%	10.67%
Ans 2.
3 Step DuPont Analysis
Net Margin =Net Income/Sales =	5.00%	6.82%	6.40%
Asset Turnover Ratio=Sales /Total Assets=	1.00	1.10	0.83
Equity Multiplier =Total Assets/Total Equity=	1.33	1.25	2.00
ROE=Net Margin*Asset Turnover*Equity Multiplier=	6.67%	9.38%	10.67%
Ans 3.
Dupont Analysis Findings ;
1. Overall ROE has gradually improved from 6.67% in 2017 to 10.67 % in 2019, which is
a good sign for the company's performance.
The ROE increase can be further analyzed by each component.
2. The Net Margin has increased in 2018 against 2017 but again reduced in 2019 against
2018 , which is a matter of some worry.
3. Asset Turnover ratio has improved in 2018 but again dipped in 2019 even below
2017 ratio. There is a 50% rise in Asset in 2018 , but the increase in sales over
previous periods is much less than increase in assets. Therefore , assets are not efficiently
being utilized and it is a matter of concern.
4. Equity multiplier is the largest contributor to ROE , and we see a steady increase in
the ratio from 2017 to 2019. This is a matter or worry as the proportion of debt is
increasing in the capital structure and the risk of the business getting higher for that.
The Risk rating of the company will be impacted due to the increased leverage and the
company should take measures to reduce the leverage as much as possible.