Question

Western Wear has total sales of $642,100, EBIT of $93,900, net income of $50,800, current assets of $153,500, total assets of $658,000, current liabilities of $78,900, and total liabilities of $213,600. What are the values of the three components of the DuPont identity?

Answer 1

Answer:

The values of the three components of the DuPont identity are Profit Margin =  7.91 %, Total Assets Turnover = 0.98 and Rate of return on asset = 7.75 %

Explanation:

The DuPont identity was developed by managers for evaluating performance. The DuPont identity shows how the return on equity is affected  asset turnover, the profit margin and leverage.

The Profit margin times the total assets turnover is called the Du Pont equation and it gives the Rate of return on asset (ROA).

ROA = Profit Margin x Total assets turnover

where,

Profit Margin = Net Income ÷ Sales

                       = $50,800 ÷ $642,100

                       = 7.91 %

Total Assets Turnover = Sales ÷ Total Assets

                                      = $642,100 ÷ $658,000

                                      = 0.98

therefore,

ROA = 7.91 % x 0.98 = 7.75 %

Conclusion

The values of the three components of the DuPont identity are Profit Margin =  7.91 %, Total Assets Turnover = 0.98 and Rate of return on asset = 7.75 %