Corporate finance
What is DuPont analysis?
Three-step DuPont expresses return on equity as the product of net profit margin, asset turnover, and equity multiplier.
Definition
Three-step DuPont expresses return on equity as the product of net profit margin, asset turnover, and equity multiplier.
Intuition
Read it as profit per unit of sales, sales per unit of assets, and assets supported by each unit of equity.
Formula
Profit margin times asset turnover times the equity multiplier equals net income divided by average equity.
Formula variables
Net income and revenue cover the same income period. Assets and equity use aligned average balances. Profit margin is a percentage; turnover and equity multiplier are multiples.
When to use it and limits
Use it to trace changes in ROE or compare peer structures. This accounting identity does not establish causality or replace cash-flow, capital-cost, and risk analysis.
Example
- Enter net income 120, revenue 1,200, average assets 1,000, and average equity 600.
- Margin = 120/1,200 = 10%; turnover = 1,200/1,000 = 1.2×; equity multiplier = 1,000/600 ≈ 1.67×.
- The product is 20% ROE, equal to net income divided by average equity.
Common mistakes
Do not confuse leverage-driven ROE with operating improvement or mix income and balance figures from mismatched periods.
Frequently asked questions
Why decompose ROE?
The same ROE can result from very different combinations of margin, turnover, and leverage; decomposition reveals the source.
Is a higher equity multiplier always better?
No. It can signal more debt and risk. Consider funding cost, debt service, and earnings stability.
Can net income be negative?
Yes. Margin and ROE will be negative, but revenue, average assets, and average equity must remain positive; examine the cause of losses.