The DuPont Identity
Many times ratios computed for a firm give a conflicting picture of performance. The DuPont Identity provides a way to breakdown ROE and investigate what areas of the firm need improvement.
The DuPont Identity indicates that a firm’s return on equity depends on its operating efficiency (profit margin), asset use efficiency (total asset turnover), and financial leverage (equity multiplier).
Equity multiplier (EM) = TA/TE = 1 + debt/equity ratio
Based on the Du Pont identity, the following factors affect the growth rate:
– Profit margin
– Total asset turnover –
– Financial policy
– Dividend policy
Please explain how they affect the growth rate of a company.