DuPont System (Extended)
We use extended DuPont system because it provides the additional insights into the effect of financial leverage. The concept and use of the model is the same as the basic DuPont system except for a further breakdown of components.
Combining the Operating profit margin and total asset turnover;
EBIT Net Sales EBIT
X =
Net Sales Total Assets Total Assets
To consider the negative effect of financial leverage, we deduct the interest expense;
EBIT Interest EBT
_ =
Total Assets Total Assets Total Assets
To find the positive effect of financial leverage, we will get;
EBT Total Assets EBT
X =
Total Assets Common Equity Common Equity
Finally to reach on ROE, we multiply the tax retention rate;
EBT Income Tax EBT
X 1- =
Common equity EBT Common Equity
In summary, we use the following five components in extended DuPont system of analysis;
EBIT
1. = Operating profit margin
T. Revenue
T. Revenue
2. = Total asset turnover
Total Assets
Interest
3. = Interest expense rate
Total Assets
Total Assets
4. = Financial leverage multiplier
Common Equity
income Tax
5. 1- = Tax retention rate
EBT
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