When to use the DuPont calculator
Use it when you know your return on equity and want to see what is behind it, or when ROE has moved from one year to the next and you want to know which part changed. You need net income and revenue from the income statement, and total assets and shareholders’ equity from the balance sheet.
The three factors
- Net profit margin (profitability) is net income as a share of revenue. It shows how much of each sale ends up as profit after all costs, interest and tax.
- Asset turnover (efficiency) is revenue relative to average total assets. It shows how much revenue the business generates from what it owns.
- Equity multiplier (leverage) is average total assets relative to average shareholders’ equity. A multiplier of 1.00 would mean no liabilities at all; 2.00 means liabilities finance half of the assets.
Multiplied together, the three factors equal return on equity. Revenue and total assets each appear once on top and once underneath, so they cancel out and leave net income over average equity.
How to read the result
The calculator shows each factor in the steps, multiplies them, and also calculates return on equity directly from net income and average equity. A result of 18.0% means the business earned 18 of net income for every 100 of average shareholders’ equity.
The value of the analysis is in the factors, not the total. Two businesses with the same ROE can get there in very different ways: one with a wide margin, slow turnover and little debt, another with a thin margin, fast turnover and heavy borrowing. If your ROE rose because the equity multiplier rose while margin and turnover stayed flat, the improvement came from more borrowing, not from better trading.
Average vs ending balances
Asset turnover and the equity multiplier use average balances, the midpoint of the opening and closing figures. Revenue and profit build up over the year, so averaging matches them with the assets and equity held across that year. If you leave an opening balance blank, the calculator uses the ending balance for that item and says so.
Because the calculator feeds the same balances into every factor, the product always matches the ROE shown alongside it. If you work the factors out yourself, keep every figure on the same basis and for the same period. Mixing average and ending balances is one reason the three factors may not multiply to a published ROE.
What the analysis does not show
- It explains ROE but does not say whether that return is enough for the risk taken.
- The equity multiplier counts all liabilities, including amounts owed to suppliers, not only borrowing.
- Net income is after interest and tax, so the margin factor mixes operating results with financing costs and one-off items. Extended versions of DuPont split these out; this calculator uses the three-factor model.
Common planning mistakes
- Aiming for a higher ROE through borrowing alone. More debt raises the equity multiplier, but the extra interest lowers net margin, so ROE only rises if the assets it pays for earn more than the borrowing costs.
- Comparing your factors with a business that has a different model. A business that sells high volumes at low prices will usually show a thinner margin and faster turnover than one that sells fewer, higher-priced items.
- Using profit and revenue for part of a year with full balance sheet figures, which makes turnover and ROE look lower than an annual figure.
Related tools
The return on equity page explains the total that DuPont breaks down. To look at the first two factors on their own, see net profit margin and asset turnover. For a closer look at the leverage factor, the debt-to-equity ratio compares liabilities with equity directly.