Question

In: Finance

In your initial post, provide your calculation for one year of ROE using the DuPont Identity....

In your initial post, provide your calculation for one year of ROE using the DuPont Identity. In your initial post you should also critically analyze the advantages and/or disadvantages to using the DuPont Identity as a tool for calculating ROE.   When responding to your peers, perform a calculation from one of the other years and identify what has changed over the years, and identify what may be influencing changes to the DuPont Identity ROE.

Annual

2018-09

2017-09

2016-09

Income Statement

Revenue

20,609

18,358

15,082

Operating Income

12,954

12,144

9,760

Net Income

10,301

6,699

5,991

Earnings Per Share

4.42

2.80

2.48

Diluted Average Shares

2,329

2,395

2,414

Balance Sheet

Current Assets

18,216

19,023

14,313

Non Current Assets

51,009

48,954

49,722

Total Assets

69,225

67,977

64,035

Current Liabilities

11,305

9,994

8,046

Total Liabilities

35,219

35,217

31,123

Stockholders' Equity

34,006

32,760

32,912

Cash Flow

Cash From Operations

12,713

9,208

5,574

Capital Expenditures

-718

-707

-523

Free Cash Flow

11,995

8,501

5,051

Solutions

Expert Solution

ROE = profit margin * total asset turnover * equity multiplier

profit margin = net income / sales

total asset turnover = sales / total assets

equity multiplier = total assets / stockholders' equity

The advantages of DuPont Identity as a tool for calculating ROE are :

  • It breaks down ROE into 3 major drivers
  • It can indicate whether ROE is changing due to actual change in profitability, or due to changes in financial leverage

The disadvantages of DuPont Identity as a tool for calculating ROE are :

  • It does not consider the cost of equity
  • Not relevant for all industries.
  • It relies on accounting data, which itself could be flawed
  • As with any ratio analysis, seasonality can distort the ratio analysis

Over the years, the net profit margin has increased substantially, whereas the total asset turnover and equity multiplier have increased only slightly. Therefore, the increase in ROE is mostly due to increase in profit margin


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