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I was just learning about DuPont Identity on investopedia with this example:

#DuPont Identity Example Calculation
Assume a company reports the following financial data for two years:

Year one net income = $180,000
Year one revenues = $300,000
Year one total assets = $500,000
Year one shareholder equity = $900,000

Year two net income = $170,000
Year two revenues = $327,000
Year two total assets = $545,000
Year two shareholder equity = $980,000

Using the DuPont identity, the ROE for each year is:

ROE year one = ($180,000 / $300,000) x ($300,000 / $500,000) x ($500,000 / $900,000) = 20%
ROE year two = ($170,000 / $327,000) x ($327,000 / $545,000) x ($545,000 / $980,000) = 17%

With a slight amount of rounding, the above two ROE calculations break down to:

ROE year one = 60% x 60% x 56% = 20%
ROE year two = 52% x 60% x 56% = 17%

But I just read that,

Shareholders’ equity = total assets − total liabilities

So the total liabilities should be a negative value in order to get a greater shareholder equity than the total assets.

I am clearly missing some pieces of the puzzle, but I don't know what.

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  • 1
    A negative liability (like a prepaid liability) would be an asset, no?
    – RonJohn
    Commented Oct 21, 2019 at 17:44
  • Technically yes, but still should be stated as a positive value in accounting, shouldn't be?
    – MattSom
    Commented Oct 21, 2019 at 17:48
  • 1
    Oh, yes. "Prepaid utilities" or some such.
    – RonJohn
    Commented Oct 21, 2019 at 17:52

1 Answer 1

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I think the example is incorrect. Good catch.

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