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Answer to Question #21488 in Finance for Ahmed Almazrouei

Question #21488
how can we use Du Pont equation as a guide to present an overview of the hospital’s financial position?
Expert's answer
Dupont equation (also Dupont’s& model) is a modified factor analysis that indicates by what factor is a change of profitability. At the base of the factor model as a tree structure - return on equity (ROE), and the signs - characterizing the factors of production and financial activity. Simply put, the factors that affect the ROE are crushed in order to clarify: what factors are more or less affect the return on equity. The three main factors:
1. Operating margin (measured as the rate of return)
2. asset utilization (measured as asset turnover)
3. financial leverage (measured as the ratio of capitalization)
"Chart Du Pont» shows how the profit margin on sales, asset turnover, and the ratio of assets to equity are reflected in return on equity (ROE).
& The three components of the analysis are the total margin (TM), total asset turnover (TATO), and equity multiplier (EM).& The product of the components is ROE.& ROE is an important indicator of profitability and potential growth.& Organizations that show high return on equity and low debt can grow without large capital outlays, allowing the income to be reinvested back into the organization. The DuPont analysis essentially determines if the business is a net producer, or consumer of cash. &
The Du Pont analysis offers the management an overall understanding of the profitability of the institution. For example, if the profit margin is high –it indicates that Riverview has attained better control over its total expenses than the majority of similar size hospitals. The asset turnover indicates if the hospital is efficient in generating revenues for every dollar of asset or not. The equity multiplier indicates how the institution possesses lower debt financing and lower risk than the average hospital. If Riverview’s return on equity (ROE) falls just above the median of similar size, which increases profit for every dollar of revenue.

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