What this calculator does
DuPont analysis takes return on equity apart and asks where it comes from. Three things drive it: how profitable each sale is, how much revenue the assets generate, and how much leverage sits underneath.
The insight is that identical returns can have very different quality. A 30.0 per cent return on equity built on a 1.67 equity multiplier is partly a borrowing story, while the same margin and turnover with no leverage at all produces 18.0 per cent, which is entirely an operating story.
The formula
Net profit margin is net income over revenue, asset turnover is revenue over assets, and the equity multiplier is assets over equity. Multiplying the three gives return on equity, with revenue and assets cancelling out.
| Term | Meaning |
|---|---|
| Net profit margin | How much of each dollar of revenue survives to the bottom line. |
| Asset turnover | How much revenue each dollar of assets produces. |
| Equity multiplier | Assets divided by equity, the leverage component. |
The inputs explained
| Field | What to enter |
|---|---|
| Net income ($) | Net income for the year. |
| Revenue ($) | Total revenue for the same year. |
| Total assets ($) | Total assets from the balance sheet. |
| Total equity ($) | Total shareholders' equity. |
When to use it
Diagnosing a change in ROE
A falling return could be margins, efficiency or deleveraging, and the breakdown says which.
Comparing two companies
Equal returns on equity can conceal completely different business models once split three ways.
Assessing the quality of a return
A return driven mainly by leverage carries more risk than one driven by margin.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much of the return comes from leverage?
The same operating performance at three levels of equity funding.
Questions
Why break return on equity into three parts?
Because the headline number hides what is driving it. Two companies at 20 per cent could be a high-margin, low-turnover luxury business and a low-margin, high-turnover retailer, and the strategies that would improve each are completely different.
Is a high equity multiplier bad?
Not inherently, but it means the return depends on borrowing. Leverage amplifies losses as readily as gains, so a return built on it is more fragile than one built on margins.
What is the relationship to return on assets?
Return on assets is margin times turnover, with no leverage. Multiplying it by the equity multiplier gives return on equity, so the gap between the two figures is exactly the contribution of leverage.
Where does the five-step version fit in?
It splits the profit margin further into tax burden, interest burden and operating margin, which separates operating performance from financing and tax effects. The three-step version is usually enough for comparison.
For the leverage component on its own, see the leverage ratios calculator. For how retained returns fund growth, see the sustainable growth rate calculator.