If we know that a firm has a net profit margin of 4.6 % , total asset turnover of 0.62 , and a financial leverage multiplier of 1.54 , what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders divided by common stock equity?

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Business

Sean Weeks

12 November, 20:35

If we know that a firm has a net profit margin of 4.6 % , total asset turnover of 0.62 , and a financial leverage multiplier of 1.54 , what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders divided by common stock equity?

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Atkins · Answer 1

4.39%

Explanation:

Using DuPont equation in computing for ROE enables further analysis of the company's strengths and weaknesses. By using this equation, ROE is segregated into different drivers of ROE that focus on key metrics of financial performance. These metrics focus on operational efficiency (Net Profit margin), asset use efficiency (Total Asset Turnover) and financial leverage (Equity or Financial Multiplier). Further, this provides information that will be used by the company in its planning activities.