GF530 Unit 4 DuPont Ratio Decomposition of Two Firms Example

Course	GF530 Financial Statement Analysis
Unit	Unit 4
Paper type	Ratio decomposition
Length	About 920 words, 6 pages double-spaced
Format	APA 7 student paper
School	Purdue University Global
Program	MS in Finance
Updated	October 2026

Free sample paper for GF530 Unit 4

Same 18 Percent, Opposite Reasons: A Unit 4 Ratio Decomposition of an Instrument Maker and a Linen Service

[Student Name]

Purdue University Global

GF530: Financial Statement Analysis

Unit 4 Ratio Decomposition

[Instructor Name]

[Date]

Both companies and every figure are composite and illustrative, in millions of dollars; the articles and textbook cited are real.

What this part is doingStating the shared figure and the opposite explanations in the lead tells the reader where the decomposition will end.

The Starting Point

The instrument maker designs and builds surgical instruments sold to hospitals. The linen service washes, repairs and delivers sheets, gowns and towels to the same hospitals under multi-year contracts. Each reports net income equal to 18 percent of average shareholders' equity. A lender or investor who stopped at that figure would treat them as equally profitable. All amounts below are in millions of dollars.

Layer 1: The Three-Part DuPont Identity

The classic identity multiplies net margin by asset turnover and then by the equity multiplier, which is simply total assets over shareholders' equity.

Instrument maker. Net income of 36 on sales of 500 is a 7.2 percent margin. Sales of 500 on total assets of 300 is a turnover of 1.67. Total assets of 300 on equity of 200 is a multiplier of 1.5. Product: 7.2 percent times 1.67 times 1.5, or 18.0 percent.

Linen service. Net income of 14.1 on sales of 400 is a 3.5 percent margin. Sales of 400 on total assets of 330 is a turnover of 1.21. Total assets of 330 on equity of 78.4 is a multiplier of 4.21. Product: 3.5 percent times 1.21 times 4.21, again about 18.0 percent.

*Commentary.* The first layer already hints at the difference: the linen service's multiplier is nearly three times the instrument maker's. But the multiplier mixes operating liabilities, such as supplier credit, with borrowed money, so it leaves open how much of the return is borrowed.

Layer 2: Reformulating Into Operating and Financing Parts

Each balance sheet is regrouped. Operating assets less operating liabilities give net operating assets, the capital tied up in running the business. Debt less any cash not needed for operations gives net financial obligations. Return on equity can then be written as return on net operating assets, plus a gearing ratio (net financial obligations divided by equity) times the spread between operating return and the after-tax cost of borrowing (Nissim & Penman, 2001).

Instrument maker. Net operating assets are 250 and net financial obligations 50, funded by equity of 200. After-tax operating income is 38, a return on net operating assets of 15.2 percent. After-tax interest is 2, a borrowing cost of 4.0 percent. The gearing ratio is 50 divided by 200, or 0.25, and the spread is 15.2 less 4.0, or 11.2 points. Return on equity is 15.2 plus 0.25 times 11.2, or 18.0 percent. Operations supply 15.2 points; borrowing adds 2.8.

Linen service. Net operating assets are 266.7 and net financial obligations 188.2, funded by equity of 78.4. After-tax operating income is 22.4, a return on net operating assets of 8.4 percent. After-tax interest is 8.3, a borrowing cost of 4.4 percent. The gearing ratio is 188.2 divided by 78.4, or 2.4, and the spread is 8.4 less 4.4, or 4.0 points. Return on equity is 8.4 plus 2.4 times 4.0, or 18.0 percent. Operations supply 8.4 points; borrowing adds 9.6.

The instrument maker would still earn about 15 percent on equity with no debt at all, while the linen service would earn about 8, so more than half of the linen service's return is borrowed, and a rise of four points in its borrowing cost would erase the entire contribution.

What this part is doingThe highlighted sentence turns the decomposition into a statement about risk, which is the conclusion graders look for in this unit.

Layer 3: Operating Return as Margin Times Turnover

Return on net operating assets splits into operating margin (after-tax operating income over sales) times net operating asset turnover (sales over net operating assets).

Instrument maker. 38 divided by 500 is a 7.6 percent margin; 500 divided by 250 is a turnover of 2.0. Product: 15.2 percent.

Linen service. 22.4 divided by 400 is a 5.6 percent margin; 400 divided by 266.7 is a turnover of 1.5. Product: 8.4 percent.

*Commentary.* The instrument maker wins on both parts. Its margin reflects patented designs and surgeon preference. The linen service runs heavy washing equipment and a delivery fleet, so each dollar of sales needs more capital, and its contracts are bid competitively, keeping margins thin.

A Check on the Reformulation

The two layers must agree, and they do. For the instrument maker, after-tax operating income of 38 less after-tax interest of 2 leaves 36, the net income used in the first layer. For the linen service, 22.4 less 8.3 leaves about 14.1. If they had not matched, an operating item would have been misclassified as financing or the reverse.

What the Decomposition Means

For an equity investor, the two 18 percent returns carry very different risk. The instrument maker's return rests on operations and would survive higher interest rates almost untouched. The linen service's return depends on borrowing at a cost well below its operating return; if its after-tax borrowing cost rose from 4.4 to 8.4 percent, its return on equity would fall to 8.4 percent. Research finds that market participants respond to the separate parts of the DuPont decomposition, not only to the total, because the parts predict future profitability differently (Soliman, 2008).

For a lender, the linen service's 2.4 gearing ratio and narrow 4.0-point spread are the figures to watch. For a manager at the linen service, the path to a sturdier return runs through turnover, such as better route density and plant utilization, rather than more debt (Penman, 2013).

What this part is doingEnding with what each reader should watch shows the decomposition serves decisions, not just arithmetic.

References

Nissim, D., & Penman, S. H. (2001). Ratio analysis and equity valuation: From research to practice. Review of Accounting Studies, 6(1), 109-154. https://doi.org/10.1023/A:1011338221623

Penman, S. H. (2013). Financial statement analysis and security valuation (5th ed.). McGraw-Hill.

Soliman, M. T. (2008). The use of DuPont analysis by market participants. The Accounting Review, 83(3), 823-853. https://doi.org/10.2308/accr.2008.83.3.823

Reading the GF 530 Unit 4 instructions

The fourth GF530 unit asks you to decompose return on equity to explain where it comes from. Begin with the three-part identity of margin, asset turnover and the equity multiplier, computed for each company. Then reformulate each balance sheet: net operating assets on one side, net financial obligations and equity on the other, with operating and financing income separated after tax. Rewrite return on equity as operating return plus the gearing ratio times the spread over the borrowing cost, and show how many points each part supplies. Split operating return into margin and turnover. Check that the layers reconcile. Interpret what the decomposition means for an investor, a lender and a manager, including how the result would change if borrowing costs rose. Cite the reformulation research and the course text in APA 7.

Inside the GF530 Unit 4 example

Both firms and their shared 18 percent are introduced first, then Layer 1 computes margin, turnover and multiplier, with commentary on why the multiplier cannot isolate debt. Layer 2 explains the reformulation with Nissim and Penman, then works each firm's net operating assets, borrowing cost, gearing ratio and spread to the same 18.0 percent. The highlighted sentence shows how much of the linen service's return is borrowed and how a four-point rise in its borrowing cost would erase it. Layer 3 splits operating return into margin and turnover, with commentary on patents and capital-heavy laundry plants. A short check confirms operating income less financing expense equals net income for both. The closing section cites Soliman on how markets use the parts and tells each reader which figure to watch.

GF530 Unit 4 rubric: what earns full points

Credit on a GF530 decomposition goes first to correct calculations in every layer, which graders verify, and then to a reformulation that classifies items properly between operations and financing. Showing that the layers reconcile is expected for full marks. The analytical share rewards explaining the economic meaning: which firm earns from operations, which from borrowing, and how sensitive each is to a change in rates. Interpretation for different readers, such as an investor, a lender and a manager, shows judgment. Instructors in the MS in Finance course look for the reformulated layer specifically, since the three-part identity alone rarely earns top marks at graduate level. Research citations, clear stacked presentation and APA 7 references complete the grade.

GF530 Unit 4 help: mistakes that cost points

A frequent GF530 Unit 4 problem is stopping at the three-part identity and reading the equity multiplier as a measure of debt, though it also includes supplier credit and other operating liabilities. In reformulating, students often leave excess cash in operations or put operating liabilities in financing, which distorts both returns. The layers are not checked against each other. Interpretation stays numeric without saying what a narrow spread means for risk. Some analyses compare firms on return on equity alone after doing all the work. For any pair of firms your case provides, keep the same order: three-part identity, reformulated layer, margin and turnover, a reconciliation check and an interpretation for each kind of reader.

Get a GF530 Unit 4 example written to your instructions

Which firms does your GF530 Unit 4 prompt compare, and does it name a decomposition framework? Send that with the rubric and any statements supplied. The paper reformulates both balance sheets, separates operating from financing return and explains what the split implies. No fee for a first custom sample; delivery within 24-48h is typical. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.

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GF530 Unit 4 questions, answered

Where should cash be classified?

Cash needed to run the business is operating; cash beyond that need is a financial asset that offsets debt. Most filings do not separate the two, so analysts often treat a small percentage of revenue as operating cash and the remainder as financial. The sample states its assumption, two percent of revenue, and applies it identically to both firms.

Where can I find a free GF530 Unit 4 sample paper?

A full GF530 Unit 4 ratio decomposition is available here, comparing an instrument maker and a linen service in three layers, with a reconciliation check and APA 7 references.

What is the gearing ratio in the reformulated identity?

It is net financial obligations divided by shareholders' equity. Multiplying it by the spread between operating return and borrowing cost shows how many points of return on equity come from debt.

Why is the equity multiplier not enough?

It divides total assets by equity, so it mixes borrowed money with operating liabilities such as supplier credit. Reformulation separates the two and shows the true contribution of borrowing.

What happens to the linen service if rates rise?

Its spread is only 4.0 points. If its after-tax borrowing cost rose by four points, borrowing would add nothing, and its return on equity would fall to its 8.4 percent operating return.