Concept #1: Ratios: DuPont Model for Return on Equity (ROE)

Practice: XYZ Company had a profit margin of 8.8%, total asset turnover of 0.77, and an equity multiplier of 1.8. What is XYZ’s Return on Equity using the DuPont Model?

Practice: A company had a profit margin of 6.1%. The company’s net sales were $3,600,000 and Cost of Goods Sold was $600,000. If total assets were $3,450,000 at the beginning of the year and $4,210,000 at the end of the year, and total equity was $2,500,000 at the beginning of the year and $3,100,000 at the end of the year, what is the company’s return on equity using the DuPont model?

Practice: A company with net sales of $820,000 and net income of $210,000, average total assets of $1,400,000 and average common equity of $940,000 is using the DuPont Model for financial analysis. What is the company’s ROE?

Net profit margin is 0.10. Asset turnover is 0.125. Financial leverage is 1.6. Compute the return on equity.
A) 1.5%
B) 1.0%
C) 2.0%
D) 2.5%

If a firm’s ROE is low and management wants to improve it, the increased use of debt could help, most directly through its effect on the...
a. equity multiplier.
b. inventory turnover.
c. profit margin.
d. times interest earned ratio.
e. total asset turnover.

Concrete Constructors has a return on assets (ROA) of 7 percent, a 6 percent profit margin, and a return on equity (ROE) of 16 percent. What is its equity multiplier?
a. 2.29
b. 2.67
c. 1.17
d. 13.71
e. 42.00