DuPont Analysis — The Decomposition of ROE
Decomposition of ROE is sometimes referred to as DuPont analysis because it was developed originally at that company. Decomposing ROE involves expressing the basic ratio (i.e., net income divided by average shareholders’ equity) as the product of component ratios. Because each of these component ratios is an indicator of a distinct aspect of a company’s performance…
Profitability Ratios
Calculation of Profitability Ratios Interpretation of Profitability Ratios Gross Profit Margin Gross profit margin indicates the percentage of revenue available to cover operating and other expenses and to generate profit. Operating Profit Margin Operating profit is calculated as gross profit minus operating costs. So, an operating profit margin increasing faster than the gross profit margin can…
Solvency Ratios
Solvency refers to a company’s ability to fulfill its long-term debt obligations. Assessment of a company’s ability to pay its long-term obligations (i.e., to make interest and principal payments) generally includes an in-depth analysis of the components of its financial structure. Solvency ratios, introduced in earlier modules in Corporate Issuers, provide information regarding the relative…