DuPont Analysis
DuPont analysis decomposes ROE into three components: Profit Margin × Asset Turnover × Financial Leverage, revealing drivers of return.
Concept map
Learn, apply, review
Definition
DuPont analysis decomposes ROE into three components: Profit Margin × Asset Turnover × Financial Leverage, revealing drivers of return.
Use case
Used in financial ratios workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about DuPont Analysis
The DuPont identity: ROE = (Net Income/Sales) × (Sales/Assets) × (Assets/Equity). This shows whether ROE comes from operational efficiency (margin), asset utilization (turnover), or financial risk (leverage). Useful for diagnosing performance and comparing companies with similar ROE but different business models.
Example: Two retailers both have 15% ROE: Retailer A (high margin, low turnover): 10% margin × 1.0 turnover × 1.5 leverage. Retailer B (low margin, high turnover): 3% margin × 3.3 turnover × 1.5 leverage. Same result, radically different business models.