Question

Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders’ equity

Short answer

Per the Du Pont analysis, the return on assets is computed by multiplying the net profit margin with the total assets turnover. And the return on stockholder’s equity is computed by multiplying the return on the asset with the equity multiplier.

Step-by-step solution

By the Du Pont system, return on assets is broken down as:

The return on assets is computed as follows:

$\mathbf{Return}\mathbf{}\mathbf{on}\mathbf{}\mathbf{assets}\mathbf{=}\mathbf{Net}\mathbf{}\mathbf{profit}\mathbf{}\mathbf{marging}\mathbf{\times }\mathbf{Total}\mathbf{}\mathbf{asset}\mathbf{}\mathbf{turnover}$

By the Du Pont system, return on stockholder’s equity is broken down as:

The return on equity is computed as follows:

$\mathbf{Return}\mathbf{}\mathbf{on}\mathbf{}\mathbf{equity}\mathbf{=}\mathbf{Net}\mathbf{}\mathbf{profit}\mathbf{}\mathbf{margin}\mathbf{\times }\mathbf{Total}\mathbf{}\mathbf{asset}\mathbf{}\mathbf{turnover}\mathbf{\times }\mathbf{Equity}\mathbf{}\mathbf{multiplier}$