Many investors only focus on the DuPont model Return on Equity a firm generates. While this is a very important figure, a better test of a company’s true economic characteristics is to divide net income into the sum of the average inventory and average property, plant, and equipment balance as shown on the balance sheet. Why is this test better? Other financial ratios and metrics can be dressed up for an initial public offering or by a company’s managements; this test is much harder to fake.
