DuPont Analysis

Definition

DuPont analysis breaks down return on equity (ROE) into three components—net profit margin, asset turnover, and financial leverage—to reveal the drivers of shareholder returns. The formula expresses ROE as (Net Income ÷ Revenue) × (Revenue ÷ Assets) × (Assets ÷ Equity). By decomposing ROE in this manner, analysts can identify whether profitability, efficiency, or leverage primarily drives changes in equity returns. For example, rising ROE driven by higher profit margins indicates pricing power or cost control, while increased leverage could signal higher risk despite stable operations. DuPont analysis thus provides a nuanced view of performance, guiding investors and management in pinpointing strengths and addressing weaknesses in business strategy.

See also