# ROE/Dupont model questions

An analyst caluclated the following from a company’s financials: ROE 2003: 16.8% 2004: 18.0% Return on Total Assets: 2003: 10.5% 2004: 10.0% Net Profit Margin: 2003: 4.2% 2004: 4.0% Based on the info above, during 2004, did the company experience an increase in the financial leverage ratio and/or asset turnover ratio? The answer is: Yes(Financial Leverage) and No(Asset T.O. ratio) For the financial leverage ratio, they take ROE/ROA for both years to get financial leverage. Not sure why. And for Asset T.O. ratio, they take ROA/Net Profit Margin to get Asset T.O. Can someone explain why they calculated it like that? Maybe break down the DuPont model for me???

ROE = NI / CE ROA = NI / TA So ROE / ROA = (NI / CE) / (NI/TA) = TA/CE = Financial Leverage So 2003 0.168 / .105 = 1.6 2004 .18 / .10 = 1.8 So Financial Leverage has increased Total Asset Turnover = NS / TA NPM = NI/NS ROA = NI/TA To NS / TA = (NI/TA ) / (NI/NS) = ROE / NPM 2003 .105 / .042 = 2.5 2004 .10 / .04 = 2.5 So Total Asset turnover has not changed. So answer is YES and No respectively. Hope this helps. CP

I think this was an exact question, inclusive of numbers that came on the June examination. CP

roa = net income /assets net profit margin= net income/sales roa /net profit margin = net income/ assets *sales/net income= sales/assets= Asset turnover 2.5 for 2003 and 2.5 for 2004 since roe= net profit margin* asset turnover * financial leverage roe increases=net profit margin decreases *asset turnover constant*financial leverage must increase

cpk123 Wrote: ------------------------------------------------------- > I think this was an exact question, inclusive of > numbers that came on the June examination. > > CP cpk You seem to be killing this stuff…what happened in June?

do not know…

I’m sure you will get a good result this time.