In short
DuPont analysis breaks return on equity into net profit margin, asset turnover and the equity multiplier, showing whether a change in return comes from profitability, efficiency or leverage.
Key takeaways
- Return on equity = (net income ÷ sales) × (sales ÷ total assets) × (total assets ÷ equity).
- A rise in return driven only by the equity multiplier means more leverage and more risk.
- Return on assets is the product of the first two components.
Where it's tested
BAR: Financial Statement Analysis — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Under the DuPont framework, a company's ROE increased from 12% to 18%, driven entirely by an increase in the equity multiplier while margin and asset turnover were flat. What does this indicate?