What Is DuPont Analysis? Breaking Down ROE Simply

DuPont analysis is a technique for understanding why a company's return on equity (ROE) is high or low. Instead of taking ROE as one number, it breaks it into three simpler pieces you can reason about separately.

The three drivers of ROE

• Profit margin — how much profit the company makes per rupee of sales. (Is it a high-margin business?)
• Asset turnover — how much sales it generates per rupee of assets. (Is it using its assets efficiently?)
• Leverage — how much debt it uses to amplify returns. (Is the ROE boosted by borrowing?)

Multiply the three together and you get ROE. The insight is that two companies with the same ROE can get there very differently.

Why the breakdown matters

A 20% ROE driven by fat margins and efficient assets is high-quality. The same 20% ROE driven mostly by heavy leverage is fragile — it will collapse (or blow up) if conditions turn. DuPont analysis exposes which story you're looking at.

How to do it

You can compute all three pieces from a company's financials: profit and revenue from the income statement, assets and equity from the balance sheet.