Q19. Du Pont analysis

What is the Du Pont analysis of the return on assets (ROA)?

A19.

Du Pont analysis shows that the return on assets (ROA) is the product of the profit margin ratio and the assets turnover ratio.

(1) Return on assets (ROA)

= Net income / Average total assets

(2) Profit margin ratio

= Net income / Sales

(3) Assets turnover ratio

= Sales / Average total assets

(4) Return on assets (ROA)

= Net income / Average total assets

= (Net income / Sales) x (Sales / Average total assets)

= Profit margin ratio x Assets turnover ratio

[Entity 19-a]

Profit margin ratio = 6%

Assets turnover ratio = 1.25

What is the return on assets of the entity?

Return on assets (ROA)

= Profit margin ratio x Assets turnover ratio

= 6% x 1.25 = 7.5%

[Entity 19-b]

Return on assets (ROA) = 9.6%

Profit margin ratio = 8%

What is the assets turnover ratio of the entity?

Return on assets (ROA)

= Profit margin ratio x Assets turnover ratio

= 8% x Assets turnover ratio = 9.6%

Assets turnover ratio = 1.2