DuPont analysis.

In plain English

DuPont analysis breaks return on equity into net profit margin times asset turnover times the equity multiplier, so a reader can see which of the three is moving the result. Two companies can post the same return on equity for completely different reasons: one earns fat margins, another turns assets quickly, a third simply borrows more. Margin measures profit per dollar of sales, turnover measures sales per dollar of assets, and the equity multiplier measures assets per dollar of equity. A rising return on equity driven only by the multiplier is a debt story, not an operating improvement. A five-step version splits the margin further to separate interest and tax effects.

01Why it matters

It stops you from praising a company for a high return on equity when the only thing that changed was how much it borrowed.

02The math, step by step

Say net income is 50,000,000 dollars, revenue 1,000,000,000 dollars, assets 500,000,000 dollars, and equity 250,000,000 dollars. Margin is 5 percent, turnover is 2.0, and the equity multiplier is 2.0. Return on equity is 20 percent (0.05 times 2.0 times 2.0).

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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