DuPont Analysis and its importance
The Return on Asset and Return on Equity are one of the most important considerations an investor takes while making an investment decision. It gives an insight into how well a company is using its assets to generate revenue and determines the value it creates for its shareholders and investors. However, these ratios still do not provide the whole picture. It is important to break down the components of ROA and ROE, and understand each of their current positions so that an investor can make a more informed decision. Without breaking down the ROE, an investor can be duped into believing that a company is a good investment when, in reality, it's not. Hence, to break down the ROE components and understand each of their roles and effect on the ROE ratio, a DuPont Analysis is performed.