Du Pont Analysis

May 19th, 2015
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A type of analysis that examines a company's Return on Equity (ROE) by breaking it into three main components:profit margin, asset turnover and leverage factor. By breaking the ROE into distinct parts, investors can examine how effectively a company is using equity, since poorly performing components will drag down the overall figure

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conservationPrudence concept: revenue andprofitsare included in thebalance sheetonly when they arerealized(or there isreasonable'certainty' of realizing them) butliabilitiesare included when there is a reasonable 'possibility' of incurring them. Also calledconservation concept.Du Pont analysisA type ofanalysisthat examines a company'sReturn on Equity (ROE)by breaking it into three maincomponents:profit margin,asset turnoverandleveragefactor. By breaking theROEinto distinctparts,investorscan examine how effectively acompanyis usingequity, since poorly performing components will drag down the overall figure. To calculate afirm'sROE through Du Pont analysis, multiply theprofitmargin(net incomedivided bysales),assetturnover(sales divided by assets) and leverage factor (total assetsdivided byshareholders' equity) together. The higher theresult, the higher thereturnon equity.Return on EquityROE. Ameasureof how well acompanyused reinvestedearningsto generate additional earnings, equal to afiscal year'safter-taxincome(afterpreferred stockdividendsbut before commonstock dividends) divided bybook value, expressed as apercentage. It is used as a general indication of the company'sefficiency; in otherwords, how muchprofitit isableto generate given theresourcesprovided by itsstockholders.investorsusually look for companies withreturnsonequitythat areh

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