DuPont formula for Southwest Airlines, Caterpillar, and Proctor and Gamble
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The DuPont formula defines the net return on shareholder's equity as a function of operating margin, asset turnover, interest burden, financial leverage, and income tax.
Using data from the financial reports of Southwest Airlines, Caterpillar, and Proctor and Gamble calculate the return on equity using the DuPont ratio for years ending 2005-2007 (show all work).
Briefly discuss the impact of the changes in asset turnover and financial leverage on ROE over the the three years.
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The expert briefly discusses the impact of the changes in asset turnover and financial leverage on ROE over the three years.
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Southwest Airlines's ROE using the DuPont ratio.
2005: ROE = (Profit margin) (Total assets turnover) (Equity multiplier)
= (Net income / sales) (sales / total assets) (total assets / common equity)
= (484 / 7,584) (7,584 / 14,003) (14,003 / 6,675)
= 0.0638 * 0.5416 * 2.0978
= 7.25%
2006: (Profit margin) (Total assets turnover) (Equity multiplier)
= (Net income / sales) (sales / total assets) (total assets / common equity)
= (499 / 9,086) (9,086 / 13,460) (13,460 / 6,449)
= 0.0549 * 0.675 * 2.0871
= 7.73%
2007: (Profit margin) (Total assets turnover) (Equity multiplier)
= (Net income / sales) (sales / total assets) (total assets / common equity)
= (645 / 9,861) (9,861 / 16,772) (16,772 / 6,941)
= 0.0654 * 0.5879 * 2.4164
= 9.29%
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