Definition
DuPont analysis breaks ROE into net profit margin × asset turnover × equity multiplier. This decomposition reveals whether high returns stem from operational efficiency (margin), asset utilization (turnover), or financial leverage. The extended five-factor model further separates tax burden, interest burden, and operating margin.
functions Formula
ROE = Net Margin × Asset Turnover × Equity Multiplier
lightbulb Example
Company ROE is 18%. DuPont reveals: 6% margin × 2.0 turnover × 1.5 leverage = 18%. A competitor has same ROE but via 3% margin × 1.0 turnover × 6.0 leverage—far riskier.
verified_user Key Points
- Reveals true drivers behind ROE
- Identifies operational vs leverage-driven returns
- Five-factor model adds tax and interest burden analysis
- Essential for quality-of-earnings assessment