3.3 The Dupont Identity

weakness in either operating or asset use efficiency (or both) will show up in a diminished return on asset, which will translate into

a lower ROE

what is the last part of change up on the return on equity (ROE) that makes it the dupoint identity?

adding the x equity multiplier at the end.

the dupoint identity tells us that roe is affected by three things?

operating efficiency ( as measured by profit margin) asset use efficiency (as measured by total asset turn over) financial leverage (as measured by equity multiplier)

what are the two parts of return on assets?

profit margin and total asset turn over

Return on equity formula

profit margin x total asset turn over x equity multiplier

if ROE is unsatisfactory by some measure, then the dupoint identity tells you

where to start looking for the reasons.