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The Fundamentals of Financial Statement Analysis as Applied to the Coca-Cola Company by Carl McGowan

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CHAPTER 3

The 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 financial performance. The three variables that determine 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 to sales, where net income is sales minus costs. A firm with a higher NPM would be more efficient than a firm with a lower NPM; other things being equal. TAT is a measure of a company’s efficiency in using assets to generate sales. A firm with a higher TAT ratio ...

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