DuPont analysis
ROE decomposition
DuPont analysis breaks return on equity into three drivers, margin, asset turnover, and leverage, so you can see whether a high ROE was earned or borrowed.
Formula
DuPont identity
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
Equity multiplier
Equity Multiplier = Total Assets ÷ Shareholders' Equity
Benchmark: A good ROE rises through margin or turnover, not through the leverage multiplier
Reading the number
Two companies can both show a 25 percent ROE and be completely different businesses. One earns it by selling at a higher profit per unit, or by selling more volume per unit of asset. The other earns it by piling on debt, which raises the equity multiplier.
The warning pattern: net margin roughly flat, asset turnover roughly flat, ROE up, and the leverage multiplier jumped. That ROE increase came purely from borrowing. Do not be pleased by it. Treat it as poor-quality ROE. The first check whenever ROE jumps is whether debt has increased.
Indian example
Related ratios
Glossary terms
From the research
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