Financial Management

Posted: October 17th, 2013

Financial Management

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Financial Management

DuPont Return on Assets is a ratio on the relationship between the net income, sales, and the total assets of a company. The ratio aims at measuring the return on equity, ROE. The aim of calculating the DuPont return on assets to compare the sales or revenue generated to the net income. The ratio is used for showing the impact of assets turnover and the profit margin. The ratio can indicate the efficiency of the company at using its total assets in generating revenues or sales. The ration is also referred to as return on investments, since assets are considered the investments of the owners of the company (Gibson, 2010).

The formula of return on assets is as shown below

DuPont return on assets == Net Profit × Net Sales      

Net Sales × Total Assets

Using this formula, the return on assets for Megaframe Computer can be calculated with ease considering the figures needed for the calculation are provided in their financial statements.

Megaframe return on assets == $100,800 × $ 720,000

$ 720,000 × $ $ 410,000

== 26%

The DuPont return on assets from Megaframe Computer Co. to the nearest whole percentage is 26%. This means that the company is generating using its total assets to generate sales by 26%. For this ratio, the higher the percentage recorded, the more efficient the company is able to generate sales using its assets. Thus, in order to interpret the results well, Megaframe Computer Co. would need to consider its return on assets for the previous years to find out whether the company is improving or going down in terms of generating sales using its assets. The ratio enables the stockholders to ways in which returns on their investment would be affected when there are changes in operations, use of assets, or even the capital structure (Godwin & Alderman, 2010). Thus, when the return on assets according to the DuPont method reduces, it will indicate that the company is not using its assets, as it should. Thus, the ratio serves to indicate the health of the company in terms of its effectiveness in directing the resources to drive sales further.

References

Gibson, C.H. (2010). Financial Reporting and Analysis: Using Financial Accounting Information (Book Only). New York, NY: Cengage Learning

Godwin, N.H., & Alderman, C.W. (2010). Financial ACCT 2010. New York, NY: Cengage Learning