Updating the 100-Year-Old DuPont Analysis: Using ROME vs. ROE.

Gupta, Neeraj J.; Synn, Wonhi; Upton, Kate

The traditional DuPont Analysis, first used almost 100 years back, decomposes Return on Equity (ROE) as a means to explain changes in investor returns. We propose using instead Return on Market Equity (ROME), to incorporate an additional component into the traditional DuPont Analysis-the book-to-market ratio, a proxy for a firm's level of intangible assets which while valued by the market may not appear on corporate balance sheets. We demonstrate that firms 'assets are becoming increasing more intangible, and the traditional DuPont Analysis omits this crucial piece of a firm's ability to generate profit. We illustrate how the ROME is a more effective measure of investor returns for a number of firms and industry sectors. This updated DuPont Analysis makes understanding investor returns more meaningful for students in finance and accounting courses, and is more relevant to analysts and investors.

ACCOUNTING; FINANCIAL statements; STOCK exchanges; INTANGIBLE property; MARKET capitalization; RATE of return; FINANCE education

Journal of Financial Education, 2019, Vol 45, Issue 2, p1

0093-3961

Academic Journal