Unit 3 — Working With Financial Statements G6

GROUP 6 — DuPont Identity, Financial Statement Evaluation & Benchmarking

DuPont Identity

Breaks ROE into profit margin, total asset turnover, and equity multiplier to show what drives a firm's return on equity.

DuPont Identity Formula

ROE = Profit Margin × Total Asset Turnover × Equity Multiplier.

Profit Margin in DuPont

Measures operating efficiency, or how well the company controls costs.

Total Asset Turnover in DuPont

Measures asset-use efficiency, or how well the company uses its assets to generate sales.

Equity Multiplier in DuPont

Measures financial leverage, or the company's use of debt relative to equity.

Internal Uses of Financial Statement Analysis

Performance evaluation, compensation decisions, comparing divisions, and planning for the future.

External Users of Financial Statement Analysis

Creditors, suppliers, customers, and stockholders.

Benchmarking

Comparing financial ratios to another meaningful standard because ratios by themselves provide limited information

Time-Trend Analysis

Compares a firm's financial performance across different periods to see how performance is changing over time.

Peer Group Analysis

Compares a company's financial performance with similar companies or companies in the same industry.

SIC and NAICS Codes

Industry classification systems that can help identify comparable companies for peer group analysis.