DuPont Analysis: How to Break Down Return on Equity

What Is DuPont Analysis?

DuPont analysis decomposes Return on Equity (ROE) into its component drivers, revealing whether strong or weak ROE comes from profit margins, asset efficiency, or financial leverage. Developed in the 1920s, it remains one of the most insightful tools in financial analysis.

The Three-Factor Model

ROE = Net Profit Margin x Asset Turnover x Equity Multiplier. Net Profit Margin = Net Profit / Revenue. Asset Turnover = Revenue / Total Assets. Equity Multiplier = Total Assets / Equity. The three factors multiply to give ROE: (Net Profit / Revenue) x (Revenue / Total Assets) x (Total Assets / Equity).

Worked Example

Company A: Net margin 5%, asset turnover 2.0x, equity multiplier 2.0x. ROE = 5% x 2.0 x 2.0 = 20%. Company B: Net margin 10%, asset turnover 0.8x, equity multiplier 2.5x. ROE = 10% x 0.8 x 2.5 = 20%. Both achieve 20% ROE but through entirely different means. Company A relies on asset efficiency; Company B on higher leverage. DuPont reveals this — a simple ROE comparison would not.

The Five-Factor Extension

The extended model further splits net profit margin into: tax burden (Net Profit / EBT) x interest burden (EBT / EBIT) x operating margin (EBIT / Revenue). This separates operating performance from the effects of financing and taxation, giving a more granular view of ROE drivers.

How Finance Professionals Use It

DuPont is particularly useful for understanding why ROE has changed year over year or why one company's ROE differs from a peer's. It identifies whether management should focus on margins, asset utilisation, or capital structure. It is examined in ACCA AFM and FR and CIMA P2 and F3.