# what's up with this formulation of ROE?

Please could someone explain how this formulation is derived? It’s in the answers to practice Q’s in Schweser, but never explained in the notes… ROE=[(EBIT/S)(S/A)-(I/A)] (A/EQ)1-t

This is the extended Du Pout Formula, which include tax burden and interest burden

This is the 5 part form for the ROE Dupont Model. ROE = NI / EQ = (EBIT - Int) ( 1-T) / EQ = (EBIT - Int) ( 1-T) / A * A/EQ = (EBIT / A - Int /A) ** A/EQ * (1-T) = (EBIT/S * S/A - Int /A ) * A/EQ * (1-T) = (Operating Margin * Asset Turnover - Int Coverage ) * Financial Leverage * (1-T) CP

So you have: ROE= Net Income / Total equity = Net Income/total sales x Total sales/ Total Assets X Total Asset/ Total equity = Net Income/EBT x EBT/EBIT x EBIT/Revenue X Asset turnover x Leverage = (Tax Burden) x (Interest Burden) x (EBIT Margin) x Asset turnover x Leverage I hope this helps

strangedays the formula you have above is not exactly the same thing as what relentless has above. Please look at my derivation above, which is what Relentless has above. ROE=[(EBIT/S)(S/A)-(I/A)] (A/EQ)1-t ROE = NI / EQ = (EBIT - Int) ( 1-T) / EQ = (EBIT - Int) ( 1-T) / A * A/EQ = (EBIT / A - Int /A) ** A/EQ * (1-T) = (EBIT/S * S/A - Int /A ) * A/EQ * (1-T) = (Operating Margin * Asset Turnover - Int Coverage ) * Financial Leverage * (1-T) CP

Hi CP, thanks for your note. I guess both are usefull, it is just another way to derive the ROE. Anyway…I love this team work!

cpk, thanks so much…i suppose it’s just simple algebra, but it’s hard to get used to that formulation and figure out what it means more concretely

That is definitely there as the extended Dupont formula, in FSA, under the Financial Ratios section. Read it up. There definitely has been questions on this topic in the past. CP