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Return on Equity

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An analyst applies the Du Pont system of financial analysis to the following data for a company:

Leverage ratio (assets/equity) = 2.2
Total asset turnover = 2.0
Net profit margin = 5.5%
Divident payout ratio = 31.8%

Given that ROE = (Net profits/Pretax profits) x (Pretax profits/EBIT) x (EBIT/Sales) x (Sales/Assets) x (Assets/Equity)

Find the company's return on equity (ROE).

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Solution Summary

The solution explains the calculation of ROE using the DuPont equation

Solution Preview

It is given that,

ROE = (Net profits/Pretax profits) x (Pretax profits/EBIT) x (EBIT/Sales) x (Sales/Assets) x (Assets/Equity)

If we take only (Net profits/Pretax profits) x (Pretax profits/EBIT) x ...

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