Reading the accounts
DuPont analysis
Breaking return on equity into margin, asset efficiency and leverage to see where it comes from.
How it works
The decomposition separates three very different sources of the same ROE: how profitable each sale is, how much revenue each asset generates, and how much borrowing is used.
Two companies with identical ROE can have entirely different risk profiles, and this is the fastest way to see it.
Formula
ROE = net margin × asset turnover × equity multiplierRelated terms
- Return on equityNet income as a percentage of shareholders’ equity — profit earned on the owners’ capital.
- Net marginNet income as a percentage of revenue — what proportion of each sale ends up as profit.
- LeverageUsing borrowed money to increase exposure beyond what your own capital would buy.
- Return on invested capitalOperating profit after tax as a percentage of all the capital invested in the business, debt and equity alike.
More in Reading the accounts
- EBITDA
- Depreciation and amortisation
- Earnings growth
- Deferred revenue
- Earnings per share
- Cost of goods sold
- Economic profit
- Cash flow statement
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.