Question

break(s) down the return-on-equity into three components. a - asset management ratios b - profitability ratios c - the dupont identity d - market value ratios

Answer 1

The correct answer is DuPont Identity.

The DuPont identity break(s) down the return-on-equity (ROE) into three components, that is profit margin, total asset turnover, and financial leverage.

This expression has arisen and later been derived from the DuPont company that started using this idea way back in the 1920s. An explosives salesman in the company who went by the name Donald Brown used this method in an internal report in the year 1912.

It is calculated by multiplying the net profit margin by equity by the asset turnover.

• DuPont Analysis = Net Profit Margin × Asset Turnover × Financial Leverage.
• Net Profit Margin = Revenue of a company x net income of a company.
• Asset Turnover (AT) = average total assets of a company x sales generated by the company.

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