Dr. Vance holds a Ph.D. in Financial Economics and specializes in advanced corporate valuation and ratio analysis.
The **DuPont Analysis ROE Calculator** helps investors and managers decompose the Return on Equity (ROE) into its three constituent parts: profitability, asset efficiency, and financial leverage. **Input any three of the four core variables** (ROE, Net Profit Margin, Asset Turnover, or Equity Multiplier) to solve for the missing one.
DuPont Analysis ROE Calculator
DuPont Analysis ROE Formulas
The core DuPont formula breaks down ROE (Return on Equity) into its three main financial efficiency drivers. All ratios must be used in decimal form for calculation ($R_{dec} = R / 100$).
Note: For calculation, all percentage inputs (ROE, NPM) must be divided by 100.
Formula Source: Investopedia: DuPont Analysis
Variables Explained
The three components driving the return on equity:
- Return on Equity (ROE, F): The net profit earned per dollar of shareholders’ equity (%).
- Net Profit Margin (NPM, P): Measures the company’s operating efficiency (Net Income / Sales) (%).
- Asset Turnover Ratio (ATR, V): Measures the company’s asset use efficiency (Sales / Average Total Assets) (x).
- Equity Multiplier (EM, Q): Measures the company’s financial leverage (Average Total Assets / Average Shareholders’ Equity) (x).
Related Calculators
Further explore the metrics underlying the DuPont Analysis:
- Net Profit Margin Calculator
- Total Asset Turnover Ratio Calculator
- Debt-to-Equity Ratio Calculator
- Sustainable Growth Rate Calculator
What is DuPont Analysis?
DuPont Analysis, developed by the DuPont Corporation, is a framework for dissecting a firm’s Return on Equity (ROE) into three distinct components. It demonstrates that ROE, a key measure of corporate performance, is driven by three areas: profit margin (how efficiently the company generates profit from sales), asset turnover (how efficiently the company uses its assets to generate sales), and financial leverage (how much debt the company uses).
This decomposition is invaluable because it allows analysts to pinpoint the specific operational or financial changes that are driving ROE improvements or declines. For example, a high ROE could be driven by high profit margins (great operational skill) or simply by high financial leverage (high risk). DuPont Analysis provides the necessary clarity.
How to Calculate DuPont Analysis ROE (Example)
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Identify Components:
We want to find the ROE ($ROE$). Net Profit Margin ($\mathbf{NPM}$) is $\mathbf{6.0\%}$. Asset Turnover Ratio ($\mathbf{ATR}$) is $\mathbf{1.5}$x. Equity Multiplier ($\mathbf{EM}$) is $\mathbf{2.0}$x.
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Convert Percentage to Decimal:
$$ NPM_{dec} = \frac{6.0\%}{100} = \mathbf{0.06} $$
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Apply the DuPont Formula:
$$ ROE_{dec} = NPM_{dec} \times ATR \times EM = 0.06 \times 1.5 \times 2.0 = \mathbf{0.18} $$
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Determine the ROE:
$$ ROE = 0.18 \times 100 = \mathbf{18.0\%} $$ The estimated Return on Equity is $\mathbf{18.0\%}$.
Frequently Asked Questions (FAQ)
A: Equity Multiplier is Total Assets / Total Equity. Since Total Assets must always equal Total Liabilities + Total Equity, the ratio is always 1 or higher. A higher EM means the company uses more debt relative to equity (higher leverage).
A: The standard formula is simply $ROE = \text{Net Income} / \text{Shareholders’ Equity}$. The DuPont formula is an algebraic expansion that gives deeper insight into the components driving that result, allowing for clearer performance benchmarking.
A: Yes, assuming the other two components (Asset Turnover and Equity Multiplier) remain constant, increasing the Net Profit Margin will directly and proportionally increase the ROE.
A: A higher EM increases ROE but also increases financial risk. It indicates more debt is being used. While debt can boost returns, excessive debt raises the probability of default.