Formula
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier (Net Income ÷ Revenue) × (Revenue ÷ Total Assets) × (Total Assets ÷ Equity)
The Short Version
DuPont analysis breaks ROE into three components, revealing WHY a company's ROE is high or low — whether it comes from strong profit margins, efficient use of assets, or simply heavy financial leverage (debt).
Explain It Like I'm 10
Imagine two kids both end up with the same amount of money at a school fundraiser, but one earned it by selling expensive items with a big markup to just a few people, while the other sold cheap items to a ton of people with a tiny markup, and a third kid just borrowed a bunch of money from friends to make it look like they raised a lot. All three might show the 'same result,' but DuPont analysis is like asking HOW each of them actually got there — through pricing power, through hustle and volume, or through leverage/borrowing.
Step-by-Step Example
- 1 Net Profit Margin (Net Income ÷ Revenue): 10%.
- 2 Asset Turnover (Revenue ÷ Total Assets): 1.5×.
- 3 Equity Multiplier (Total Assets ÷ Equity): 2.0×.
- 4 Multiply all three: ROE = 10% × 1.5 × 2.0 = 30%.
- 5 If a competitor also shows 30% ROE, but with only a 5% margin, 2× turnover, and a 3.0 equity multiplier, their high ROE is coming much more from BORROWING (leverage) than from actual profitability — a much riskier way to reach the same headline number.
Quick Recap
- ✓ Net Profit Margin: profitability on each sales dollar.
- ✓ Asset Turnover: how efficiently assets are used to generate revenue.
- ✓ Equity Multiplier: how much leverage (debt) is amplifying returns to equity holders.
- ✓ Two companies can have identical ROE for very different reasons — DuPont analysis reveals whether that ROE is high-quality (from margins/efficiency) or risky (from leverage).