From the course: Finance for Non-Financial Managers

Unlock the full course today

Join today to access over 25,200 courses taught by industry experts.

A deeper look at the DuPont framework’s three components

A deeper look at the DuPont framework’s three components

From the course: Finance for Non-Financial Managers

Start my 1-month free trial Buy for my team

A deeper look at the DuPont framework’s three components

“

- The return on equity number can be decomposed into three components, profitability, efficiency, and leverage. We also call this the DuPont framework, which is a formula that lays these three ratios out in a very systematic fashion. Let's again use balance sheet and income statement numbers for two hypothetical companies. Uncertain and Benchmark. As we saw in the previous module, Uncertain has a return on equity of 9.3%, and Benchmark had a return on equity of 20.3%. The 9.3% return on equity is low, especially when compared to the 20.3% return on equity Benchmark. We can use this DuPont framework to reveal why Uncertain's ROE is low. The DuPont framework is constructed on the idea that return on equity is composed of three distinct components, profitability, efficiency, and leverage. The leverage measure tells us how much money we have borrowed to leverage the initial equity investment, and thus buy more assets. Why do we buy assets? We buy assets to generate sales. The second…

Contents