The DuPont Equation in Relation to Industries Because dividend payments are not tax deductible, maintaining a high proportion of debt in a company's capital structure leads to a higher return on equity. This is because the increased use of debt as financing will cause a company to have higher interest payments, which are tax deductible. As was the case with asset turnover and profit margin, Increased financial leverage will also lead to an increase in return on equity. Similar to profit margin, if asset turnover increases, a company will generate more sales per asset owned, once again resulting in a higher overall return on equity.Ĭomponents of the DuPont Equation: Financial Leverageįinancial leverage refers to the amount of debt that a company utilizes to finance its operations, as compared with the amount of equity that the company utilizes. Companies with low profit margins tend to have high asset turnover, while those with high profit margins tend to have low asset turnover. As one feature of the DuPont equation, if the profit margin of a company increases, every sale will bring more money to a company's bottom line, resulting in a higher overall return on equity.Ĭomponents of the DuPont Equation: Asset TurnoverĪsset turnover is a financial ratio that measures how efficiently a company uses its assets to generate sales revenue or sales income for the company. Profit margin is calculated by finding the net profit as a percentage of the total revenue. It is an indicator of a company's pricing strategies and how well the company controls costs. Profit margin is a measure of profitability. By splitting ROE (return on equity) into three parts, companies can more easily understand changes in their ROE over time.Ĭomponents of the DuPont Equation: Profit Margin Under DuPont analysis, return on equity is equal to the profit margin multiplied by asset turnover multiplied by financial leverage. The DuPont Equation: In the DuPont equation, ROE is equal to profit margin multiplied by asset turnover multiplied by financial leverage.
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