Lesson 7 of 8 · 15 min
Integrated ratio analysis and DuPont
Ratios explain each other: DuPont analysis breaks ROE into tax burden, interest burden, operating margin, asset turnover and leverage, showing exactly which part of the business moved returns.
In short
- Use ratios together: one category often answers questions raised by another (e.g. a falling quick ratio explained by rising DOH).
- Two-step DuPont: ROE = ROA × financial leverage.
- Three-step: ROE = net profit margin × total asset turnover × financial leverage.
- Five-step: ROE = tax burden (NI/EBT) × interest burden (EBT/EBIT) × EBIT margin × total asset turnover × leverage.
- Leverage raises ROE only while the company earns more on borrowed money than it costs; a higher tax burden ratio means a lower tax rate.
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