DuPont Analysis
A decomposition of return on equity into profit margin, asset turnover and financial leverage, showing what drives the return.
Formula
ROE = Net Profit Margin x Asset Turnover x Equity Multiplier = (Profit/Sales) x (Sales/Assets) x (Assets/Equity)
Unit
%
In depth
The decomposition matters because two companies with identical 20% returns on equity can be entirely different businesses: one earning it from high margins, another from rapid asset turnover, a third purely from borrowing. Only the first two are business quality; the third is a financing choice that raises risk alongside return. Tracking the three components over time shows whether an improving ROE reflects a better business or simply more debt. This is the standard antidote to treating ROE as a single measure of quality.
Worked example
Net margin 9%, asset turnover 1,000 / 1,200 = 0.833, equity multiplier 1,200 / 450 = 2.67. ROE = 9% x 0.833 x 2.67 = 20%. A peer reaching the same 20% with a 4% margin and a 5.0 multiplier is a far riskier proposition.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “DuPont Analysis” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.