DuPont Identity

What is the 'DuPont Identity'

The DuPont identity is 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)

BREAKING DOWN '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/TEMultiply by 1 (TA/TA) and then rearrangeROE = (NI / TE) (TA / TA)ROE = (NI / TA) (TA / TE) = ROA * EMMultiply by 1(S/S) and then rearrangeROE = (NI / TA) (TA / TE) (S/S)ROE = (NI / S) (S / TA) (TA / TE)ROE = PM * TAT * EMROE = Profit Margin * Total Asset Turnover * Equity Multiplier

When:ROE = Return on EquityNI = Net IncomeTE = Total EquityTA = AssetsROA = Return on AssetsEM = TA/TE = 1 + D/E = The Equity MultiplierS = Sales

Learn more about the DuPont analysis by reading What are the main differences between return on equity (ROE) and return on assets (ROA)?​

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RELATED FAQS
  1. How does the equity multiplier change in relation to asset turnover?

    Find out about the relationship between the equity multiplier and the asset turnover ratio and how both are used in the DuPont ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. What is the equity multiplier's affect on Return on Equity (ROE)?

    Learn about how to calculate the equity multiplier in the three-step DuPont analysis method, and see what impact a higher ... Read Answer >>
  5. 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 >>
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