From the course: Finance for Non-Financial Managers
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The DuPont framework: Walmart and Target
From the course: Finance for Non-Financial Managers
The DuPont framework: Walmart and Target
- The DuPont framework is a tool to decompose a company's return on equity into three dimensions, profitability, efficiency, and leverage. Return on equity, or ROE, is computed by dividing net income by equity. ROE again, is a measure of the amount of profit earned per dollar of owner investment. In 2022, Walmart's return on equity was 13.5%, the ROE for Target 24.8%. This means that shareholders who invested $100 in Walmart earned profits of $13.50 in 2022. If those shareholders had invested the same $100 in Target, they would've earned $24.80 cents. ROE is the fundamental measure of financial performance from the standpoint of the shareholders. How much did we earn for each $100 that we invested? The idea behind the DuPont framework is that return on equity computed as net income divided by equity can be mathematically decomposed into three ratios, profit margin, asset turnover, and assets-to-equity. Here is that decomposition. Now, let's use these 2022 numbers to compute the DuPont…
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