Section 8
The DuPont Equation, ROE, ROA, and Growth
Book
Version 3
By Boundless
By Boundless
Boundless Finance
Finance
by Boundless
5 concepts
![Thumbnail](../../../../../../figures.boundless-cdn.com/11218/square/dupont.jpg)
The DuPont Equation
The DuPont equation is an expression which breaks return on equity down into three parts: profit margin, asset turnover, and leverage.
![Thumbnail](../../../../../../figures.boundless-cdn.com/11213/square/roe.jpg)
ROE and Potential Limitations
Return on equity measures the rate of return on the ownership interest of a business and is irrelevant if earnings are not reinvested or distributed.
![Thumbnail](../../../../../../figures.boundless-cdn.com/11267/square/graf2-profitability.jpeg)
Assessing Internal Growth and Sustainability
Sustainable-- as opposed to internal-- growth gives a company a better idea of its growth rate while keeping in line with financial policy.
![Thumbnail](../../../../../../figures.boundless-cdn.com/14403/square/83dbaf82a55f3b7d5683e86376.jpg)
Dividend Payments and Earnings Retention
The dividend payout and retention ratios offer insight into how much of a firm's profit is distributed to shareholders versus retained.
![Thumbnail](../../../../../../figures.boundless-cdn.com/11345/square/roa.jpg)
Relationships between ROA, ROE, and Growth
Return on assets is a component of return on equity, both of which can be used to calculate a company's rate of growth.