This guide is for educational purposes only and does not constitute investment advice. Data sourced from SEC EDGAR filings. Past performance is not indicative of future results. Consult a qualified financial advisor before making investment decisions.
What Is DuPont Analysis?
Return on Equity (ROE) tells you how much profit a company generates per dollar of shareholder investment. But ROE alone does not tell you why it is high or low. DuPont Analysis breaks ROE into three pieces so you can see which driver — profitability, efficiency, or leverage — is doing the work.
The Formula
DuPont Analysis is a framework that decomposes Return on Equity (ROE) into three component drivers: Profit Margin, Asset Turnover, and Equity Multiplier. It reveals whether a company's ROE comes from operational excellence, efficiency, or financial leverage.
Formula
Expanding each component:
ROE = (Net Income / Revenue) × (Revenue / Total Assets) × (Total Assets / Total Equity)
Notice that Revenue cancels in the first two terms, and Total Assets cancels in the last two, leaving Net Income / Total Equity — the ROE formula.
The Three Drivers Explained
Profit Margin (Net Income / Revenue)
How much profit does the company keep from each dollar of sales? A company selling $100 of goods and keeping $20 as profit has a 20% profit margin.
High margin signals: Strong pricing power, efficient cost control, premium brand, or intellectual property moats. Software companies often have margins above 25%.
Asset Turnover (Revenue / Total Assets)
How efficiently does the company use its assets to generate sales? A company with $100M in assets generating $150M in sales has a turnover of 1.5.
High turnover signals: Efficient use of capital, fast inventory movement, lean operations. Retailers and distributors typically have turnovers above 1.5.
Equity Multiplier (Total Assets / Total Equity)
How much has the company borrowed to amplify returns? If a company has $100M in assets but only $40M in equity, the multiplier is 2.5 — meaning $60M came from debt.
High multiplier signals: More leverage, which amplifies both gains and losses. Banks typically have multipliers of 8-15. High leverage increases financial risk.
Common ROE Patterns
Two companies can both show 20% ROE but get there in very different ways. Understanding the source of ROE helps you assess whether it is sustainable:
| Pattern | What It Means | Example |
|---|---|---|
| High Margin + Low Turnover + Low Leverage | Quality-driven returns | Software, luxury goods |
| Low Margin + High Turnover + Low Leverage | Volume-driven efficiency | Grocers, distributors |
| High Margin + Low Turnover + High Leverage | Debt-amplified returns | Utilities, REITs |
| Low Margin + Low Turnover + High Leverage | Weakest pattern | Distressed companies |
The first pattern (quality-driven) is generally the most desirable because it suggests pricing power and competitive advantages. The last pattern is a warning sign — every factor is working against sustainable equity returns.
Industry Norms
Each industry has a characteristic DuPont profile. Comparing a company to its sector norms reveals whether it is operating within expected boundaries:
| Industry | Profit Margin | Asset Turnover | Equity Multiplier |
|---|---|---|---|
| Technology / Software | 20-35% | 0.3-0.7 | 1.5-3.0 |
| Retail | 2-5% | 1.5-3.0 | 2.0-3.5 |
| Banking | 20-30% | 0.03-0.08 | 8-15 |
| Healthcare | 10-20% | 0.4-0.8 | 1.5-2.5 |
| Manufacturing | 5-15% | 0.5-1.0 | 1.5-2.5 |
| Energy | 5-15% | 0.3-0.7 | 1.5-3.0 |
Tech companies have low asset turnover because their most valuable assets (intellectual property, engineers) do not fully appear on the balance sheet. Retailers have high turnover because they sell fast-moving goods from a fixed store base.
See It on Billiver
Billiver calculates all three DuPont components for every S&P 500 company using SEC 10-K filing data:
Compare each company's DuPont breakdown to the industry norms above to understand what makes its ROE tick.
Limitations
Negative equity
Companies with negative equity (from aggressive buybacks) make DuPont Analysis meaningless. Both ROE and the Equity Multiplier produce misleading results.
One-time items
Large one-time gains or charges can distort the Profit Margin component for a single year. Look at 3-5 year trends for more reliable analysis.
Rounding differences
The product of the three components may not exactly equal the reported ROE due to rounding or timing differences in how SEC data is reported. Billiver shows both values for transparency.
Data source: SEC EDGAR 10-K filings. All three DuPont components are calculated from reported financial data.
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This content is for educational purposes only and does not constitute investment advice. Always consult with a qualified financial advisor for personalized guidance.