6.3: The DuPont Model
The DuPont formula provides upper management with a top-down look into the company’s performance starting with ROE, which is of the most interest to company shareholders. The CEO looks into : 1. P rofitability ( “Profit Margin” – see below) , 2. O peratin g ( “Total Asset Turnover”) , and 3. F inancial perspectives (“Leverage”) .
Some Key Points:
- Good business management produces a favorable ROA.
- Proper leverage may enhance the investor’s return – ROE. Without Leverage, ROA = ROE.
- You will notice that the ROA and Leverage ratios do not match up with our own definitions.