What is Formula DuPont? Introduction to the DuPont equation

Return on equity.

Also known as return on equity, return on equity or shareholder return or shareholder return (ROE), it is an indicator that measures the return on investment relative to shareholders' equity, reflecting the company's ability to generate net profit from its net asset value. It is calculated by dividing the profit after deducting preferred stock dividends and special profits by shareholders' equity.

This ratio calculates the return on investment of the company's common shareholders, which is an important indicator of the profitability of a listed company.

ROE = Net Income Shareholders' Equity.

ROE reflects a company's ability to reinvest earnings to earn greater returns, calculated by dividing net income (net of preferred dividends and special profits) by shareholders' equity.

However, a company's high equity yield does not mean that it is profitable. Some industries, such as consulting firms, usually have a higher ROE because they do not require much asset investment. Some industries require a lot of infrastructure to generate profitability, such as oil refineries.

Therefore, a company's profitability cannot be judged solely by ROE. Generally speaking, capital-intensive industries have higher barriers to entry and less competition, while industries with high ROE but low assets are easier to enter and face greater competition. Therefore, ROE should be used to compare the same industry.

DuPont Equation.

ROE can be broken down into the following equation:

ROE = (Net Income Turnover) x (Turnover Total Assets) x (Total Assets Shareholders' Equity).

Marginal Profit Margin) x (Asset Turnover) x (Leverage Ratio).

Also known as the Dupont Formula, it gives investors a better understanding of the changes in ROE.

If the conditions remain the same, one of these increases will help drive up ROE. For example, an increase in leverage can represent an increase in debt relative to shareholders' equity. Since interest is tax-free and dividends are not, an increase in debt-to-capital structure will lead to an increase in ROE.

Of course, if the company's debt is too high, and the creditor asks for a higher risk premium and the debt expenditure rises, the ROE will fall instead of rising. Therefore, when the company's return on assets (ROA) is greater than the interest rate on debt, the increase in debt has a positive effect on ROE.

When analysing the ROE of different industries, it is important to pay attention to the role of individual ratios. For example, in industries such as retail, where profit margins are usually low, leverage ratios are mediocre. However, stores can have a very high turnover, and asset turnover becomes an important indicator for analyzing such industries.

Warren Buffett argues that successful management performance is a high return on equity (ROE), not just a continuous increase in earnings per share. Since 2000-2005, more than 80% of listed companies in China have an ROE between -5% and +5%, and those with an ROE of more than 30% are not even less than 2%.

That's a valuable 2%! It is the hope and backbone of China's **. But beware of companies with high short-term ROE that are actually financially problematic.

In the famous DuPont equation, ROE is divided into three factors:

ROE = Net Profit Ending Shareholders' Equity = Net Profit Operating Income * Operating Income Total Assets * Total Assets Closing Shareholders' Equity.

Net Profit Margin) (Total Asset Turnover) (Leverage Ratio).

operating activities) (investment activities) (fund-raising activities).

The return on equity can be broken down into three numerical ratios, which represent the three activities of corporate management, so it is important to pay attention to ROE, a good financial analysis that can help investors understand the company.

The Dupont Formula gives investors a better understanding of the changes in ROE. Return on equity (ROE) can be broken down into the following equation: ROE = (Net Income Turnover) x (Turnover Total Assets) x (Total Assets Shareholders' Equity) = (Net Profit Margin) x (Asset Turnover) x (Leverage Ratio).