Which factors does the DuPont Identity consider?

The DuPont Identity breaks down the components that lead to a company's return on equity (ROE). It specifically considers net income in relation to sales (profitability) and total assets (efficiency). The formula can be expressed as:

Return on Equity (ROE) = (Net Income / Sales) × (Sales / Assets)

This highlights how effectively a company is generating profit from its sales and utilizing its assets to achieve that profit.

By considering net income alongside sales, the DuPont Identity allows us to analyze the profitability of the firm. The relationship between sales and total assets (the asset turnover ratio) assesses operational efficiency and how well the company is using its resources to generate revenue.

Options that include total equity or other unrelated metrics do not capture the essence of the DuPont framework as effectively, as they lack the direct indicators of profitability and operational efficiency that are central to understanding a company's financial performance.