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DuPont Identity

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Dictionary Says

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 Says

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

When:
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

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