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DUPONT ANALYSIS I. RETURN ON EQUITY (ROE) Heemm un equity (ROD na cloudy watched number among bears lod cable investors Ic s unnig misleading however, as it is vulnerable in measures that incurase its value while also mailing the work cakes. Without a way of breaking doran NOlt components, investors could be doped into believing a company is a posad investment when it's not Road on to kam hes bower Dupont indenis no book apari RCll and pain a rouch better undentinding of where movements in MOHA are coming from. Dullor anthus is s fromesor's fu andying fund owl performance on dally poopdied by the Below Corpontoon one sikh and to compare the There are two version of DuPont anihin, one oudring doo mpong it into 3 The bencey of BOB is doran is an important memurs that only room to nunten to comput! mi Income and thendothis open! Net Income ROB- Shareholder Equity If the number goes up. it is ponerally a good soon for the company as it is theading that they nig of when the company tiles on more debt, thereby decrening sharchelker aquiry. This would increase the company's kycrops, which could be a good thing. last it will shin mike the mock riskier. II. THREE-STEP DUPONT To Pou pon croon onand in indyek model ther fils this need by brooking dran KIN! ing many compare caution Der'em andyes shares the cans of shifts in the number There are two varmints of Deliver arules the onginal three superdog, and anextended for sure equation. The three stop equation books up LOH: into free very important comesenteROE - NPM > Asset Turnover > Explay Multiplier where: NPM - Net profit margin, the measure of operating Asset Turnover = Mewore of wiset use elliclergy Equity Multiple - Measure of financial leverage The Thing-Simp DuPont Calculation Net Income Hairs ROE Sales Shareholders Equity We were have RU beckon in manysoon the fast is not proft mann and day pooand is the HOE Net Income Sharedthen' Evilly HOE - NPM : Aunt Turnover . Equity Melkiper worth mont turcanes the starcinaly the conjoin robot we of its musti and ry in multipher getting mer leveripod the nick might done more of a divocunt despite the rise in HOL Thecompany, and the only nowon KCAll slapped the same was a larges ingway in kevingo. No muny shai the intill vituition of the company, this would be a baluen III. FIVE-STEP DUPONT The fire-wep, of cumended, 13- Foot cation breaks down ret poor margin further. I'veem the thine in ROME The Five-Stop Calculation trans IST) by makiplying the three-top cquien by I minus the company's far rate ROE- KET where ERT = Farmings lafore tar E - Equity TH - Tax rate The can break this down our more time since coming befor ton an simply rimming by for inter EBIT x (1 - TH) where: IE - Imetest expense The practicedin of this barakdoran is not a clear as the this upp, but this identity poopribs in with NOE - (OPM N AT - TER) & EM X TAR where OPM - Opening profit margin IER - Interest expoine rate EM = Equity multiplier TRI . Tac retention ImeIf the company has a high borrowing cost, its interest expenses on more debt could mute the positive effects of the leverage. IV. LEARN THE CAUSE BEHIND THE EFFECT Both the three- and five-step equations provide a deeper understanding of a company's ROE by examining what is changing in a company rather than looking at one simple ratio. As always with financial statement ratios, they should be examined against the company's history and its competitors. For example, when looking at two peer companies, one may have a lower ROB:, With the five-step equation, you can see if this is lower because: creditors perceive the company as riskier and charge it higher interest, the company is poorly managed and has leverage that is too low, or the company has higher costs that decrease its operating profit margin. Identifying sources like these leads to better knowledge of the company and how it should be valued; V. THE BOTTOM LINE A simple calculation of ROE may be easy and tell quite a bit, but it does not provide the whole picture. If a company's ROE is lower than its peers, the three- or five-step identities can help show where the company is lagging, It can also shed light on how a company is lifting or propping up its ROE. DuPont analysis helps significantly broaden understanding of ROE