DuPont analysis shows what is really driving return on equity. Break ROE into profitability, asset efficiency and financial leverage, and with the five-step model, separate the effects of taxes and interest.
How it works
Break return on equity into the profitability, efficiency and leverage components that drive it, using both the three-step and five-step DuPont models.
3-step: ROE = (Net income ÷ Revenue) × (Revenue ÷ Assets) × (Assets ÷ Equity)
5-step: ROE = (NI ÷ EBT) × (EBT ÷ EBIT) × (EBIT ÷ Revenue) × (Revenue ÷ Assets) × (Assets ÷ Equity)Common uses
- Comparing companies with similar ROE but different strategies
- Identifying whether ROE changes come from operations or leverage
- Equity research and credit analysis
Worked example
The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.
| Net income | $3,480,000 |
| Revenue | $48,500,000 |
| Average total assets | $52,400,000 |
| Average shareholders’ equity | $21,700,000 |
| Pre-tax income (EBT) | $4,670,000 |
| Operating income (EBIT) | $5,820,000 |
| Return on equity | 16.0% |
| Return on assets | 6.6% |
| Net profit margin | 7.2% |
| Asset turnover | 0.93× |
| Equity multiplier | 2.41× |
Both models multiply back exactly to the same return on equity.
Interpreting the results
- Two companies with the same ROE can get there very differently: one through margins, another through leverage.
- Rising ROE driven mainly by the equity multiplier signals more financial risk, not better operations.
- Use average assets and equity so the balance-sheet figures match the period of the income statement.
Frequently asked questions
What is the DuPont formula?
The three-step DuPont formula is ROE = Net profit margin × Asset turnover × Equity multiplier. The five-step version splits net margin into tax burden, interest burden and operating margin.
Why use DuPont analysis instead of ROE alone?
Two companies can report the same ROE for very different reasons. One may earn high margins, another may turn assets quickly, and a third may rely on debt. DuPont analysis reveals which, and whether the return is sustainable.
Is a high equity multiplier good or bad?
A high equity multiplier boosts ROE by financing more assets with debt, but it also increases financial risk. ROE growth that comes mainly from leverage deserves more scrutiny than growth from margins or efficiency.
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