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L.10 · INTERMEDIATE · 2 MIN

DuPont Analysis: Decomposing Return on Equity

ROE is the most-watched profitability metric, but a high ROE can come from very different sources. DuPont Analysis decomposes it to reveal the true drivers.

Quiz · 5 questions ↓

Live data

AAPL — ROE, Net Margin. Open AAPL on the Ledge to see current values.

Formula

ROE = Net Margin x Asset Turnover x Equity Multiplier

Compare

ROE DriverHigh Margin, Low TurnoverLow Margin, High Turnover
ExampleLuxury goods (Hermes)Retail (Walmart)
Net Margin25%2.5%
Asset Turnover0.7x2.5x
ResultHigh ROE from profitabilitySimilar ROE from efficiency

Try it

Check the **DuPont breakdown** for any company in the Financials section. Is the ROE driven by margins, efficiency, or leverage?

Key insight

ROE from high margins is more sustainable than ROE from high leverage. DuPont tells you which kind you are looking at.

Check-in

DuPont decomposition: ROE = Net Margin × Asset Turnover × Equity Multiplier. Company X has 25% ROE: 10% margin × 1.5 turnover × 1.67 leverage. What's the risk story?
Check your understanding

Sit with the ideas.

A firm has Net Income of $100,000, Revenue of $1,000,000, Total Assets of $500,000, and Equity of $200,000. What is ROE using the DuPont model, and what is the biggest driver?

Why:
Continue this lesson in the appAdaptive practice · saves your progress · remediation when you miss

Other lessons in this course.

  1. 01Accrual vs Cash Accounting
  2. 02Depreciation: Spreading the Cost of Assets
  3. 03Stock-Based Compensation: The Hidden Cost
  4. 04Adjusting Entries: Why Period-End Matters
  5. 05Revenue Recognition: The ASC 606 Five-Step Model
  6. 06Bad Debts: When Customers Don't Pay
  7. 07Inventory: FIFO vs. LIFO and Why It Matters
  8. 08PP&E Deep Dive: Four Depreciation Methods and Asset Disposal
  9. 09The Cash Flow Statement: Follow the Actual Money
  10. 10DuPont Analysis: Decomposing Return on Equity— reading now
  11. 11EPS and Dilution: The Most Watched Number on Wall Street
  12. 12Deferred Taxes: Why Tax Expense Differs from Taxes Paid
  13. 13Lease Accounting: The Hidden Debt That Isn't So Hidden Anymore
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