CHAPTER 2

Determining the Short-Term Growth Rate Using the Extended DuPont System of Financial Analysis

The DuPont system of financial analysis uses a financial model that is based on the return on equity (ROE) of a firm. The DuPont system of financial analysis is used to examine a firm’s financial statements and the condition in which the firm functions. According to the formula, the three elements of ROE are net profit margin (NPM), total asset turnover (TAT), and the equity multiplier (EM). NPM measures a company’s overall profitability. NPM is the ratio of net income, sales minus costs, to sales. A firm with a higher NPM would be more efficient than a firm with a lower NPM. TAT is a measure of a company’s efficiency in using assets to generate ...

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