From the course: Finance for Non-Financial Managers (2015)
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A deeper look at the DuPont framework's three components
From the course: Finance for Non-Financial Managers (2015)
A deeper look at the DuPont framework's three components
- When it comes to return on equity, it is a general overall measure of a company's performance for a given period of time, and it is the foundation for one of the most amazing creations in accounting history, the DuPont framework. Now, the DuPont framework has three components: profitability, efficiency, and leverage. Let's start with leverage because that's the thing we do first. When it comes to leverage, that's an indication of how much money have we borrowed to purchase assets. And why do we purchase assets? We purchase assets in hopes of generating sales. The leverage measure tells us, of our assets, how many were acquired with the equity that's been put into the company. We've borrowed to buy. It gives us a measure of how much we've borrowed to buy assets, and why do we buy assets? To generate sales. That's what the efficiency ratio is measuring. We buy assets to generate sales. The more sales we can…
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