DuPont Analysis: worked example
| Net income | $180,000 |
|---|---|
| Revenue | $2,400,000 |
| Total assets | $1,200,000 |
| Shareholders' equity | $600,000 |
| Return on equity | 30.0% |
| Net profit margin | 7.5% |
| Asset turnover | 2.00× |
| Equity multiplier | 2.00× |
DuPont Analysis: formula
OpenStax Principles of Finance: profitability ratios and the DuPont method
Common error: Comparing return on equity alone. A firm that reached 30 percent through heavy debt is not equal to one that reached it through high margins.
Net income and revenue come from the income statement, and total assets and shareholders' equity come from the balance sheet. Use the same period, and preferably average assets and equity, though the tool takes point values. Net income should be after tax and interest.
Check that equity is positive, since the analysis breaks down when equity is negative.
DuPont Analysis: changing Net income
| Net income | Return on equity | Net profit margin | Asset turnover | Equity multiplier |
|---|---|---|---|---|
| $144,000 | 24.0% | 6.0% | 2.00× | 2.00× |
| $162,000 | 27.0% | 6.8% | 2.00× | 2.00× |
| $180,000 (example) | 30.0% | 7.5% | 2.00× | 2.00× |
| $198,000 | 33.0% | 8.3% | 2.00× | 2.00× |
| $216,000 | 36.0% | 9.0% | 2.00× | 2.00× |
DuPont Analysis: compare input ranges
| Input | Tested from | To | Return on equity: low input | Return on equity: high input | Swing |
|---|---|---|---|---|---|
| Net income | $162,000 | $198,000 | 27.0% | 33.0% | 6.0% (20%) |
| Shareholders' equity | $540,000 | $660,000 | 33.3% | 27.3% | 6.1% (20%) |
| Revenue | $2,160,000 | $2,640,000 | 30.0% | 30.0% | 0.000% |
| Total assets | $1,080,000 | $1,320,000 | 30.0% | 30.0% | 0.000% |
DuPont Analysis: individual input comparisons
| Input | Value | Return on equity | Net profit margin | Asset turnover | Equity multiplier |
|---|---|---|---|---|---|
| Net income | $144,000 | 24.0% | 6.0% | 2.00× | 2.00× |
| $162,000 | 27.0% | 6.8% | 2.00× | 2.00× | |
| $180,000 | 30.0% | 7.5% | 2.00× | 2.00× | |
| $198,000 | 33.0% | 8.3% | 2.00× | 2.00× | |
| $216,000 | 36.0% | 9.0% | 2.00× | 2.00× | |
| Revenue | $1,920,000 | 30.0% | 9.4% | 1.60× | 2.00× |
| $2,160,000 | 30.0% | 8.3% | 1.80× | 2.00× | |
| $2,400,000 | 30.0% | 7.5% | 2.00× | 2.00× | |
| $2,640,000 | 30.0% | 6.8% | 2.20× | 2.00× | |
| $2,880,000 | 30.0% | 6.3% | 2.40× | 2.00× | |
| Total assets | $960,000 | 30.0% | 7.5% | 2.50× | 1.60× |
| $1,080,000 | 30.0% | 7.5% | 2.22× | 1.80× | |
| $1,200,000 | 30.0% | 7.5% | 2.00× | 2.00× | |
| $1,320,000 | 30.0% | 7.5% | 1.82× | 2.20× | |
| $1,440,000 | 30.0% | 7.5% | 1.67× | 2.40× | |
| Shareholders' equity | $480,000 | 37.5% | 7.5% | 2.00× | 2.50× |
| $540,000 | 33.3% | 7.5% | 2.00× | 2.22× | |
| $600,000 | 30.0% | 7.5% | 2.00× | 2.00× | |
| $660,000 | 27.3% | 7.5% | 2.00× | 1.82× | |
| $720,000 | 25.0% | 7.5% | 2.00× | 1.67× |
DuPont Analysis: combined input changes
| Net income / Shareholders' equity | $480,000 | $600,000 | $720,000 |
|---|---|---|---|
| $144,000 | 30.0% | 24.0% | 20.0% |
| $162,000 | 33.8% | 27.0% | 22.5% |
| $180,000 | 37.5% | 30.0% | 25.0% |
| $198,000 | 41.3% | 33.0% | 27.5% |
| $216,000 | 45.0% | 36.0% | 30.0% |
DuPont Analysis: which assumptions move the result?
DuPont Analysis: values and definitions
| Quantity and definition | Value used |
|---|---|
| Net income | $180,000 |
| Revenue | $2,400,000 |
| Total assets | $1,200,000 |
| Shareholders' equity | $600,000 |
| Return on equity | 30.0% |
| Net profit margin | 7.5% |
| Asset turnover | 2.00× |
| Equity multiplier | 2.00× |
DuPont Analysis: half and double Net income
| Net income | Return on equity |
|---|---|
| $90,000 | 15.0% |
| $180,000 | 30.0% |
| $360,000 | 60.0% |
The breakdown is an accounting identity and does not show causes, only where to look. Year-end balance sheet values can distort turnover and the equity multiplier when the business changes quickly. Extended versions split the margin into tax burden, interest burden and operating margin.
Industry norms for each factor differ.
Business Finance calculators: Employee Turnover Rate Calculator, Net Promoter Score Calculator, Marketing Metrics Calculator, Sum-of-the-Years'-Digits Depreciation Calculator, Units of Production Depreciation Calculator, OEE (Overall Equipment Effectiveness) Calculator.
The DuPont breakdown splits return on equity into three separate levers: how much profit each sale keeps, how hard the assets work, and how much borrowing sits behind them. With a 7.5 percent margin, an asset turnover of 2 and an equity multiplier of 2, the return on equity is 30 percent. Two firms with the same 30 percent can get there by very different routes, and the routes carry different risks.
Look at which lever is doing the work. A return driven mostly by the equity multiplier rests on borrowing and is more fragile.
Explore each driver: the profit margin calculator for the first, the asset turnover page for the second and the debt-to-equity calculator for the third. The return on equity and return on assets pages give the summary figures. Improvement plans should target the factor with the most room.
Which factor should I try to improve first?
The identity does not choose a priority. Examine the separate income, asset and equity changes before testing an operating or financing decision. Holding the other factors fixed, a larger equity multiplier scales ROE; new borrowing can also change interest cost and net income.
Can two companies have the same ROE for different reasons?
Yes. One may earn it from high margins and another from high turnover or heavy debt, and the DuPont breakdown reveals which.
What does DuPont analysis show?
That ROE equals profit margin times asset turnover times the equity multiplier, so you can see whether returns come from profitability, efficiency or leverage.