Hong Life CalculatorsUnderstanding the DuPont ROE calculator — concept and principle
Return on equity (ROE) tells you how much profit a company earns for each unit of shareholders' money, but a single number hides where it comes from. The DuPont analysis splits ROE into three drivers: profitability, efficiency and leverage. Investors and analysts use it to compare companies, to follow one company over several years, and to check whether a high ROE rests on strong margins or on heavy borrowing.
How it is calculated
- Net profit margin = net income ÷ revenue
- Asset turnover = revenue ÷ total assets
- Equity multiplier = total assets ÷ shareholders' equity
- ROE = margin × turnover × multiplier = net income ÷ equity
- ROA = net income ÷ total assets = margin × turnover
All four inputs are in the same currency, and income and revenue should cover the same period, usually one year.
The principle
The three-step formula is an identity: revenue and total assets appear once in a numerator and once in a denominator, so they cancel and leave net income ÷ equity. Its value is in the split. Margin shows how much of each sale becomes profit, turnover shows how many sales the assets generate, and the multiplier shows how much of the asset base is financed by liabilities rather than equity. The method grew out of internal financial reporting at the DuPont company in the early twentieth century and is now standard in financial statement analysis.
Worked example
- Net income $12,000,000, revenue $150,000,000, total assets $200,000,000, equity $80,000,000.
- Margin = 12 ÷ 150 = 8%.
- Turnover = 150 ÷ 200 = 0.75×.
- Multiplier = 200 ÷ 80 = 2.5×.
- ROA = 12 ÷ 200 = 6%; ROE = 8% × 0.75 × 2.5 = 15%, the same as 12 ÷ 80.
How to read the result
Different business models reach the same ROE by different routes. A supermarket has thin margins and high turnover; a software firm has high margins and low turnover; a bank has a very high multiplier. Compare a company with its own history and with peers in the same industry rather than with the whole market. A rising ROE driven only by the multiplier means more borrowing, which raises risk when profits fall. An equity multiplier of 2.5 means liabilities fund 60% of assets.
Common mistakes
- Mixing a full-year income figure with a quarter's balance sheet.
- Using year-end values when equity changed sharply during the year; averages are often fairer.
- Reading a high ROE as good news when equity is tiny or negative because of buybacks or losses.
Frequently asked questions
What is a good ROE?
It depends on the industry and on leverage; compare with peers and with the company's own past rather than one fixed number.
Why does the ROE differ from the one on a data site?
Sites often use average equity, trailing twelve months of income, or adjusted earnings.
What is the five-step DuPont model?
It further splits the margin into tax burden, interest burden and operating margin.
Sources: CFA Institute, Financial Statement Analysis curriculum (DuPont analysis) · Z. Bodie, A. Kane, A. J. Marcus, Investments, McGraw-Hill