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 
Uses and Limitations of Financial Ratios

Managing Wealth
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). 
Investing
Decoding DuPont Analysis
Get a deeper understanding of ROE with these threestep and fivestep calculations. 
Investing
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. 
Investing
What Are The Main Differences Between Return On Equity (ROE) and Return On Assets?
Return on equity and return on assets are important measures for evaluating how well a company manages the capital its shareholders entrust to it. 
Markets
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. 
Investing
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. 
Managing Wealth
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. 
Markets
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. 
Markets
Analyzing Apple's Return on Equity (AAPL)
Learn about Apple's return on equity (ROE) in fiscal 2015, and find out how net profit margin, financial leverage and asset turnover impact ROE relative to its peers. 
Markets
Analyzing Southwest's Return on Equity (ROE) (LUV)
Find out how Southwest's net margin, asset turnover and financial leverage impact return on equity (ROE). How does its ROE compare to peers and historical results?