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CFA Level 1 Question of the Week: Return on Equity
Mark Anderson, financial analyst, is discussing the ways to analyze a firm’s return on equity (ROE) with his colleague. While discussing the DuPont system of analysis, Mark states, “The DuPont equation is very useful in the analysis of return on equity. It breaks ROE into three key components – net profit margin, asset turnover and equity multiplier.”
His colleague agrees and adds, “If any one of the three components – net profit margin, asset turnover or use of equity increases, ROE will increase.”
Are the statements made by Mark and his colleague correct?
CFA Level 1 Question of the Week: Return on Equity 42 votes
Mark is right, but his colleague is wrong
Mark is wrong, but his colleague is right
2 votes
0 ·
Comments
@jak5189 was on the right track for what we were trying to test- the impact on the equity multiplier ratio.
The DuPont equation is very useful in the analysis of return on equity. It breaks ROE into three key components - net profit margin, asset turnover, and equity multiplier. Equity multiplier is the ratio assets/equity. It increases as the use of debt financing increases. Thus, his colleague is wrong.