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.
