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Du Pont analysis

On Page 797 of the Brealey textbook, Brealey discusses how the Dupont System links Return on Assets (ROA) and Return on Equity (ROE) ratios with other financial ratios in useful ways. Describe and explain some of the useful links developed by Dupont System for linking ROA and ROE with other financial ratios. Can you explain how the ratio "asset/equity" can be calculated? This is a graduate level discussion question and must be between 200-300 words.

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Return on Equity= Net Income/ Common Equity
Return on assets= Net Income/ Total Assets

Du Pont analysis is an extremely useful way of seeing how the various ratios determined a firm's profitability. The extended Du Pont equation is particularly useful:
ROE = Profit Margin x Total Assets Turnover x Equity Multiplier

= Net ...

Solution Summary

This provides the steps for Du Pont analysis