Removing Equity Income from BS effect dupont, decrease, statements, increase, reports

AnalystAlan

For a firm that reports equity income as non-operating income, removing equity income form the financial statements would most likely result in an increase in the tax burden term in the extended dupont decomposition of ROE.
Tax burden = NI/EBT
The decrease in NI form removing the Equity income will decrease the term (an apparently greater reduction in ROE due to taxes).
After the explanation above, I still don’t get it.
Can anyone plz clarify?

zbird2134

charly, while I have no idea what you’re referencing, I think I can guess the source of the confusion. Obviously if NI gets smaller so will NI/EBT (negatively affecting the ROE from an extended DuPont). NI/EBT is the ratio of post-tax income to pre-tax income - it is somewhat oddly referred to as the tax burden. This is counter-intuitive, since the “burden” in ordinary language would be the ratio of tax to EBT (or (NI-EBT)/EBT). Just guessing, but could this be the problem - that a smaller “tax burden” actually means more tax to pay proportionally?
In the DuPont equation, if you’re salvaging less return, due to a smaller “tax burden”(!), your ROE will decline accordingly.

thisisbrianly

that is an explanation of what? was it a question? i dont get what you’re asking