The DuPont formula allows the firm to break down its return into the net profit margin, which measures the firm's profitability on sales, and its total asset turnover, which indicates how efficiently the firm has used its assets to generate sales.

Question

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This statement accurately describes the DuPont formula, which decomposes return on equity (ROE) into three components: net profit margin, total asset turnover, and financial leverage. The net profit margin reflects how much profit the firm generates for each dollar of sales, while the asset turnover indicates how many dollars of sales the firm generates for each dollar of assets. By multiplying these two ratios together, the DuPont formula calculates the return on assets (ROA), which measures how efficiently the firm has utilized its resources to generate income. Finally, by leveraging the ROA with financial leverage (i.e., the ratio of total liabilities to equity), the DuPont formula calculates the ROE, which represents the return that the firm generates for each dollar of equity invested by its shareholders.

The DuPont Formula Allows the Firm to Break Down Its