Kristin Mason
Professor Blair
FIN 325
9 September 2016
The DuPont Identity
The DuPont Identity is an expression that gives a snapshot of a company’s return on equity
represented as the product of three ratios. The expression uses the profit margin, total asset turnover
and equity multiplier to simply represent the company’s return on investment. This is beneficial to
financial managers because if the ROE is unsatisfactory, the DuPont Identity can help easily identify
weaknesses, strengths and changes to make. The return on equity alone only shows how stockholders
fared during the year, but the DuPont Identity breaks the ROE down into the components that effect it.
Those components are operating efficiency that is measured by the profit margin, efficiency of asset
usage which measured by the total asset turnover, and financial leverage which is measured by the
equity multiplier.
This company’s strengths are in the value of its assets and stock. Its major weakness is in the
cost of goods sold and debt to equity ratio. The company’s profit margin is much lower than average so
they need to find a way to lower to cost of goods sold. This should allow them to be able to increase
cash and lower debts.