Back Of The Envelope Banking

Easy DuPont Formula Paints Clearer Profit Picture
By Jack Salvetti and Jeffrey Tompkins

The 2002 Sarbanes-Oxley Act has encouraged directors to understand better what drives their businesses. And, a nearly century-old equation, the DuPont Formula, may be the best way to help them chart performance issues that matter most.

A Truer Story in 5 Lines. Made famous by the renowned chemical company, the method has a long history int he manufacturing industry for determining capiatl efficiency. WIth slight modification and using just five line items, it can also have compelling and telltale application in banking. Primary advantages are twofold:

• Simple computations
• Understandingt he relevance of earnigns structure and equity capital leverage, rather than just looking at relative level of earnings performance.

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