Definition of 'DuPont Identity'
An expression that breaks return on equity (ROE) down into three parts: profit margin, total asset turnover and financial leverage. It is also known as "DuPont Analysis".
DuPont identity tells us that ROE is affected by three things:
- Operating efficiency, which is measured by profit margin
- Asset use efficiency, which is measured by total asset turnover
- Financial leverage, which is measured by the equity multiplier
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)
Investopedia explains 'DuPont Identity'
If ROE is unsatisfactory, the Du Pont identity helps locate the part of the business that is underperforming.
Here is how the DuPont identity is derived:
ROE = NI/TE
Multiply by 1 (TA/TA) and then rearrange
ROE = (NI / TE) (TA / TA)
ROE = (NI / TA) (TA / TE) = ROA * EM
Multiply by 1(S/S) and then rearrange
ROE = (NI / TA) (TA / TE) (S/S)
ROE = (NI / S) (S / TA) (TA / TE)
ROE = PM * TAT * EM
ROE = Profit Margin * Total Asset Turnover * Equity Multiplier
ROE = Return on Equity
NI = Net Income
TE = Total Equity
TA = Assets
ROA = Return on Assets
EM = TA/TE = 1 + D/E = The Equity Multiplier
S = Sales
Articles Of Interest
Take a deeper look at a company's profitability with the help of profit margin ratios.
It pays to invest in companies that generate profits more efficiently than their rivals. This is where ROE comes in.
Internal return on investment helps determine a stock's ability to propel shareholder returns.
Get a deeper understanding of ROE with these three-step and five-step calculations.
If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
The amount of debt and equity that makes up a company's capital structure has many risk and return implications.
This market can be treacherous for unprepared investors. Find out how to avoid the mistakes that keep FX traders from succeeding.
Solvency and liquidity are equally important for a company's financial health. A number of financial ratios are used to measure a company’s liquidity and solvency, and an investor should use ...
Find out what your broker is doing with your securities when you invest on margin.
Forex trading by retail investors has grown by leaps and bounds in recent years, thanks to the proliferation of online trading platforms and the availability of cheap credit. The use of leverage ...