Which of the following expresses DuPont analysis?
A)Net profit margin = total asset turnover times return on assets
B)Total asset turnover = operating asset turnover times financial leverage
C)Return on assets = net profit margin times total asset turnover
D)Return on investment = return on equity (1 - tax rate)
E)Dividend yield = dividend payout times earnings per share

Question

Quizplus · Accepted Answer

DuPont analysis is a method of decomposing return on equity (ROE) into its component parts, which are profit margin, total asset turnover, and financial leverage. The formula for DuPont analysis is ROE = Net Profit Margin x Total Asset Turnover x Financial Leverage. If we rearrange this formula to solve for any of the components, we get the following formulas:

- Net Profit Margin = ROE / Total Asset Turnover x Financial Leverage
- Total Asset Turnover = ROE / Net Profit Margin x Financial Leverage
- Financial Leverage = ROE / Net Profit Margin x Total Asset Turnover

Of the answer choices given, only C expresses one of these formulas correctly. It shows that return on assets (ROA) is equal to net profit margin times total asset turnover, which is one of the components of ROE. Therefore, C is the best choice for expressing DuPont analysis.

Which of the Following Expresses DuPont Analysis