click below
click below
Normal Size Small Size show me how
Dupont Identity
Finance Quiz #2
Term | Definition |
---|---|
DuPont Identity | an expression that breaks return on equity (ROE) down into three parts: profit margin, total asset turnover, and financial leverage/equity multiplier. |
Return on Equity | ROE is a gauge of a corporation's profitability and how efficiently it generates those profits. The higher the ROE, the better a company is at converting its equity financing into profits. |
Profit Margin | (Net Income/Sales) a measure of how much money a company is making on its products or services after subtracting all of the direct and indirect costs involved |
Total Asset Turnover | (Sales/Total Assets) how effectively companies are using their assets to generate sales. |
Financial leverage/Equity Multiplier | (Total Assets/Total Equity) the use of borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing |