Many times ratios computed for a firm give a conflicting picture of performance. The DuPont...
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Accounting
Many times ratios computed for a firm give a conflicting picture of performance. The DuPont Identity provides a way to breakdown ROE and investigate what areas of the firm need improvement.
The DuPont Identity indicates that a firms return on equity depends on its operating efficiency (profit margin), asset use efficiency (total asset turnover), and financial leverage (equity multiplier).
Equity multiplier (EM) = TA/TE = 1 + debt/equity ratio
Based on the Du Pont identity, the following factors affect the growth rate:
- Profit margin
- Total asset turnover
- Financial policy
- Dividend policy
Please explain how they affect the growth rate of a company.
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