Calculate Return on Equity (ROE) using the DuPont system.

The DuPont system is a method of analyzing the return on equity (ROE) of a company. It focuses on three components: net profit margins, total asset turnover, and financial leverage ratio. All three are combined to calculate the ROE.

Net Profit Margin: This measures how much of each dollar earned by the company becomes actual income rather than expenses or taxes. A higher net profit margin indicates that more money is being turned into profits for shareholders. The formula for this calculation is net income / total sales.

Total Asset Turnover: This measures how efficiently assets are used in generating revenue relative to their cost. A higher ratio indicates that fewer resources are required to generate revenues and suggests better management of investment dollars. The formula for this calculation is total sales / total assets.

Financial Leverage Ratio: This measure shows how much debt a company uses to finance operations relative to its equity capitalization level; it also provides insight into a firm’s risk profile since more debt increases overall riskiness of the business model but can result in greater returns if managed properly and cautiously applied over time with proper cash flow management planning strategies (i.e., reducing principle payments when possible). The formula for this calculation is total liabilities/total assets.

Once these components have been calculated the DuPont system is used to determine the ROE equation which equates as follows: Return on Equity = Net Profit Margin x Total Asset Turnover x Financial Leverage Ratio or ROE=NPMxTATxFLR

In summary, the DuPont system helps investors gain insight into whether or not a given stock has potential to increase its shareholder wealth by providing information about profitability and risk levels associated with certain investments decisions made by management.