Summary Business Accounting

Question:

Show the DuPont framework’s calculation of the three components of return on shareholders’ equity.

What information about a company do these ratios offer?



Answer:



Return on equity = Profit margin X Asset turnover X Equity multiplier



Net income = Net income X Total sales X Avg. total assets

Avg. total equity Total sales Avg. total assets Avg. total equity



The DuPont framework shows return on equity as being driven by profit margin (reflecting a

company’s ability to earn income from sales), asset turnover (reflecting a company’s effectiveness in

using assets to generate sales), and the equity multiplier (reflecting the extent to which a company has

used debt to finance its assets).