Dupont equation is a tool to assess the profitability of a company that involves three ratios at a time to reach Return on Equity (ROE). The analysis is aimed to investigate the real reason for the return on equity.
Dupont ROE = Net Profit/Sales x Sales/ Assets x Assets/Equity
The assets turn-over tells us how well the company’s assets are performing and generating revenues. Equity multiplier tells us the level of equity in the total capital structure. If the total assets are reduced the asset turnover will improve and equity multiplier will fall means that either more debt is issued or equity is reduced or not changed. The real reason for the change in ROE can be a decrease in equity rather than improved profitability.
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Data for Lozano Chip Company and its industry averages follow.
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Hatfield Medical Supply’s stock price had been lagging its industry averages,
