Financial Ratios  Return on Equity and the Dupont System
DuPont System
A system of analysis has been developed that focuses the attention on all three critical elements of the financial condition of a company: the operating management, management of assets and the capital structure. This analysis technique is called the "DuPont Formula". The DuPont Formula shows the interrelationship between key financial ratios. It can be presented in several ways.
The first is:
Formula 7.41
Return on equity (ROE) = net income / total equity
If we multiply ROE by sales, we get:
Said differently: 
The second is:
Formula 7.42
Return on equity (ROE) = net income / total equity
If in a second instance we multiply ROE by assets, we get:
Said differently: 
Uses of the DuPont Equation
By using the DuPont equation, an analyst can easily determine what processes the company does well and what processes can be improved. Furthermore, ROE represents the profitability of funds invested by the owners of the firm.
All firms should attempt to make ROE as high as possible over the long term. However, analysts should be aware that ROE can be high for the wrong reasons. For example, when ROE is high because the equity multiplier is high, this means that high returns are really coming from overuse of debt, which can spell trouble.
If two companies have the same ROE, but the first is well managed (high netprofit margin) and managed assets efficiently (high asset turnover) but has a low equity multiplier compared to the other company, then an investor is better off investing in the first company, because the capital structure can be changed easily (increase use of debt), but changing management is difficult.
More Useful Dupont Formula Manipulations
The DuPont formula can be expanded even further, thus giving the analyst more information.
Formula 7.43
ROE = (net income / sales) * (sales / assets) * (assets / equity)
If in a third instance we substituted net income for EBT * (1tax rate), we get: ROE =(EBT/sales) * (sales / assets) * (assets / equity)* (1tax rate) 
Formula 7.44
ROE = (net income / sales) * (sales / assets) * (assets / equity)
If in a forth instance we substituted EBT for EBIT  interest expense, we get: ROE = [EBIT / sales * sales / total assets  interest / total assets] * total assets / equity * [1  tax / net before tax] Said differently: ROE = operating profit margin * asset turnover  interest expense rate * equity multiplier * tax retention 

Investing Basics
Understanding the DuPont Analysis
DuPont analysis measures assets at their gross book value, rather than at net book value, in order to produce a higher return on equity (ROE). 
Fundamental Analysis
Decoding DuPont Analysis
Get a deeper understanding of ROE with these threestep and fivestep calculations. 
Economics
How Return On Equity Can Help You Find Profitable Stocks
It pays to invest in companies that generate profits more efficiently than their rivals. This is where ROE comes in. 
Stock Analysis
Analyzing Google's Return on Equity (ROE) (GOOGL)
Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company? 
Stock Analysis
Analyzing Boeing’s Return on Equity (ROE) (BA)
Learn about Boeing's return on equity and find out how the company's ROE compares to its own historical performance and aerospace industry peers. 
Stock Analysis
Analyzing UPS's Return on Equity (ROE) (UPS)
Learn about UPS's return on equity (ROE), an important metric for investors. It is useful to compare the historical ROE and in relation to peers. 
Stock Analysis
Analyzing Baidu's Return on Equity (ROE) (BIDU)
Find out how Baidu's return on equity (ROE) compares to industry peers and historical results. See how DuPont analysis treats net margin, asset turnover and leverage. 
Active Trading Fundamentals
Analyzing Facebook's Return on Equity (FB)
Learn about Facebook's return on equity (ROE), and find out how it compares to its peers. Discover how net margin, asset turnover and financial leverage impacted its ROE. 
Stock Analysis
Analyzing BP's Return on Equity (ROE)
Examine the return on equity (ROE) for British Petroleum, the slumping international energy company that seems to be falling behind its competitors. 
Stock Analysis
Analyzing Petroleo Brasileiro's Return on Equity (PBR, XOM)
Analyze the return on equity (ROE) of Petroleo Brasileiro, and identify the key factors that have driven the company's ROE down in recent years.

DuPont Analysis
A method of performance measurement that was started by the DuPont ... 
Return On Equity  ROE
The amount of net income returned as a percentage of shareholders ... 
DuPont Identity
An expression that breaks return on equity (ROE) down into three ... 
Asset Turnover Ratio
The amount of sales generated for every dollar's worth of assets ... 
Equity Multiplier
The ratio of a company’s total assets to its stockholder’s equity. ... 
Return On Average Equity  ROAE
An adjusted version of the return on equity (ROE) measure of ...

What is the equity multiplier's affect on Return on Equity (ROE)?
Learn about how to calculate the equity multiplier in the threestep DuPont analysis method, and see what impact a higher ... Read Answer >> 
Where did DuPont Analysis come from?
Learn the origins of the DuPont Analysis and how it evaluates the company's financial health by looking at more than profit ... Read Answer >> 
How does DuPont Analysis measure profitability?
Discover how the DuPont analysis system breaks down a company’s return on equity into three parts to fully analyze its efficiency ... Read Answer >> 
How does DuPont Analysis measure financial leverage?
Learn about how DuPont analysis measures financial leverage using the equity multiplier, and see when the equity multiplier ... Read Answer >> 
What are some of the advantages and disadvantages of DuPont Analysis?
Learn about the DuPont analysis financial ratio, and understand some of its primary advantages and disadvantages. Read Answer >> 
How do you calculate return on equity (ROE)?
Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Answer >>