The Du Pont Identity is the expansion of Return on equity (ROE) that was developed by the Du Pont Corporation in the early 1920’s to better identity the business activity that was affecting ROE. The Du Pont Identity looks at the relationship between Profit Margin, Total asset turnover, and Equity multiplier and their combined effect on ROE. Where the Profit Margin shows how efficiently businesses are operating. The Total assets turnover demonstrates how efficiently assets are being used. In addition, the Equity multiplier accounts for how well a firm manages its’ financial leverage, in other words how it manages its’ debt.
Taken together Profit margin, total assets turnover, and Equity multiplier will equal ROE, however the break down provided by the Du Pont Identity allows a company to see what is affecting ROE so adjustments in business practices can be made to increase efficiency and ROE.
The Du Pont Identity formula:
ROE = Profit Margin x Total assets turnover x Equity multiplier
Return on equity (ROE) is calculated by dividing Net income by Total equity. Return on equity is measurement of how the shareholders fared during the year. Increasing ROE indicates that the investors made…show more content… Kroger increased their liabilities, decreased the dividends paid, which increased retained earnings all of these actions resulted in a lower ROE. These actions leave the opinion that Kroger is stockpiling funds presumably for expansion or other asset increasing improvements. The decrease in efficiency seems to be related to a slight in increase in assets that are idle or being underutilized. The very small decrease in profit margin, the inefficient management of assets, coupled with a change in effective finical leverage has caused the Return on Equity to drop significantly, from 35.5% to