DuPont analysis
In one sentenceA method that breaks return on equity into three multiplied factors: net profit margin, asset turnover, and the equity multiplier.
Simply put
Return on equity is a single number, but the reasons it rises differ: better pricing (margin), selling more with the same assets (turnover), or more debt (equity multiplier).
The breakdown reveals the source of the return: of two businesses with a 30% return, the first may be efficient and the second loaded with debt, and DuPont tells them apart.
Worked example
A household supplies store has sales of 3,000,000 SAR, net profit of 300,000 SAR, assets of 2,000,000 SAR, and equity of 1,000,000 SAR.
Net profit margin300,000 ÷ 3,000,000 = 10%
Asset turnover3,000,000 ÷ 2,000,000 = 1.5 times
Equity multiplier2,000,000 ÷ 1,000,000 = 2 times
Return on equity = 10% × 1.5 × 230%
Formula: Net profit margin × asset turnover × (assets ÷ equity)