Course Code : COM-405

Course Title : INTRODUCTION TO BUSINESS FINANCE

Credit Hours : 3(3-0)
 Teacher Name : Moeez Ul Haq
 Class : Lecture Room (Thu)
 Class Time : 08:00 Am To 10:30 Am
 Email address : moeez5338@gmail.com
 Link for Notes :
https://drive.google.com/drive/folders/1yt22B8epsWPJI
xWPvT4CzIghCJWuprIz?usp=sharing
Ratio Analysis
The Time Value of Money ( NPV )
Share and its types
Sources of Short-Term Financing
Working Capital Management Cash Flow
planning
Standardized financial statements
Understanding Balance Sheets
Du Point Identity
Du Point Identity

 TheDuPont identity is an expression that shows a

company's return on equity (ROE) can be
represented as a product of three other ratios:
the profit margin, the total asset turnover, and
the equity multiplier.
Understanding the DuPont Identity

1. Operating efficiency, which is measured by

profit margin

2. Asset use efficiency, which is measured by

total asset turnover

3. Financial leverage, which is measured by the

equity multiplier.
 DuPont Identity

ROE = Profit margin x asset turnover x equity multiplier

 This formula, in turn, can be broken down further to:

ROE = (net income / sales) x (revenue / total assets) x

(total assets / shareholder equity)
Calculation

Year one net income = $180,000

Year one revenues or sales = $300,000
Year one total assets = $500,000
Year one shareholder equity = $900,000
Calculation

Year one net income = $180,000

Year one revenues or sales = $300,000
Year one total assets = $500,000
Year one shareholder equity = $900,000

ROE year one = ($180,000 / $300,000) x

($300,000 / $500,000) x ($500,000 / $900,000)
= 20%
Calculation

Year two net income = $170,000

Year two revenues or Sales = $327,000
Year two total assets = $545,000
Year two shareholder equity = $980,000
Calculation
Year two net income = $170,000
Year two revenues or Sales = $327,000
Year two total assets = $545,000
Year two shareholder equity = $980,000

ROE year two = ($170,000 / $327,000) x

($327,000 / $545,000) x ($545,000 / $980,000)
= 17%
Du Point

ROE = Profit margin x asset turnover x equity multiplier

1. ROE year one = 60% x 60% x 56% =
20%
2. ROE year two = 52% x 60% x 56% =
17%
Du Point
ROE = Profit margin x asset turnover x equity multiplier
1. ROE year one = 60% x 60% x 56% = 20%
2. ROE year two = 52% x 60% x 56% = 17%
You can clearly see that the ROE declined in
year two. During the year, net income,
revenues, total assets, and shareholder equity all
changed in value. By using the DuPont identity,
analysts or managers can break down the cause
of this decline. 
Question Answer session