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Explanation and Calculation of Du Pont Identity
DuPont identity:
ROE = Net Income/Sales * Sales/Assets * Assets/Shareholders' Equity
This identity starts from ROE (Net Income/Shareholders' Equity) but takes into its fold very important ratios viz- Net Profit Margin, Asset Turnover Ratio and Financial
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Rate of return on Equity (ROE)
Rate of return on Equity (ROE) = Net Income / Shareholders' Equity
This ratio can be re-written as a product of the three principal components:
ROE = (Net Income/Sales) x (Sales/Assets) x (Assets/Shareholders' Equity)
The three components are
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Starbucks Analysis - Return on Equity & Days Receivable
Therefore, we need to go to the Consolidated Statements and locate amounts for Net Income (also referred to as Net Earnings) and Shareholder's Equity to make the calculation of ROE.
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Financial Ratios and Profitability Explanations
Return on common equity (ROCE): net income/avg. net common shareholders' equity (avg. of common stock at par + retained earnings over the year, same problem) 4,200/48,810 * 100 = 8.6%
Profit margin: net income/sales (sales=revenues
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Create cash flow from financial statements
Total Liabilities and Stockholders' Equity 870,000.00 1,000,000.00
Income Statement for the year ended 12/31/2011
Amount in Dollars
Sales 2,000,000.00
Cost of Goods Sold 1,500,000.00
Gross Profit 500,000.00
Selling and Administrative
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Financial Statements: Basic Formats, Accounting Equations
A typical one would show:
Sales
-Cost of goods sold
=Gross profit
-Operating expense
=Operating Income
-Interest Expense
=Income before taxes
-Tax expense
=Net Income
Balance Sheet: Assets, liabilities and equity are listed.
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Use of accounting equation, Gomez increase or decrease, LIFO
Use the following information to calculate three profitability ratios for CMP Inc. for the year:
Net income $12,000
Sales $88,000
Total assets $140,000
Total common stockholders' equity $96,000
a.
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Present Value, Future Value, ROA, ROE
A firm has net working capital of $400, net fixed assets of $2,400, sales of $6,000, and current liabilities of $800. How many dollars worth of sales are generated from every $1 in total assets?
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Financial Management Profit Margins
__ 6.7X
Sales/fixed assets ______ 12.1X
Sales/total assets ______ 3.0X
Net income/sales ______ 1.2%
Net income/total assets ______ 3.6%
Net income/ common equity ______ 9.0%
Total debt/ total assets _