From the course: Managerial Finance Foundations
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Understanding the DuPont framework
From the course: Managerial Finance Foundations
Understanding the DuPont framework
- 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 is a measure of the amount of profit earned per dollar of owner investment. For example, in 2020, Walmart's ROE was 15.7%. The ROE for Target was 30.2%. This means that shareholders who invested $100 in Walmart earned profits of $15.70 in 2020. If those shareholders had invested that same $100 in Target, they would have earned $30.20. 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? So, at least in 2020, the Walmart shareholders didn't do as well as did the Target shareholders. Why not? Well, a quick way to get some insight into this question is to use the DuPont framework, to decompose the ROE for both Walmart…
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