DuPont Identity

AAA

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/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)?​

RELATED TERMS
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  2. Equity Multiplier

    The ratio of a company’s total assets to its stockholder’s equity. ...
  3. Asset Turnover Ratio

    The amount of sales generated for every dollar's worth of assets. ...
  4. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  5. Profit Margin

    A ratio of profitability calculated as net income divided by ...
  6. Asset

    1. A resource with economic value that an individual, corporation ...
RELATED FAQS
  1. No results found.
Related Articles
  1. Fundamental Analysis

    Ratio Analysis Tutorial

    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.
  2. Fundamental Analysis

    Decoding DuPont Analysis

    Get a deeper understanding of ROE with these three-step and five-step calculations.
  3. Markets

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  4. 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.
  5. Markets

    Earnings Power Drives Stocks

    Internal return on investment helps determine a stock's ability to propel shareholder returns.
  6. Fundamental Analysis

    Efficiency Ratio

    There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
  7. Stock Analysis

    What’s The Best Airline Stock In the Industry?

    With many airlines forced to seek bankruptcy protection, Southwest Airlines stands out as having consistently remained profitable throughout its history.
  8. Stock Analysis

    Is 3D Systems Sell-Off A Buying Opportunity?

    It's not easy to find stocks that have sold off in the past year, but 3D Systems's shares have taken a nosedive in the beginning of 2014.
  9. Investing

    Why Do We Like A Mature U.S. Tech Industry?

    The U.S. tech industry, particularly blue-chip, mature companies, has room to run in this expensive bull market.
  10. Active Trading Fundamentals

    20 Rules To Trade More Professionally

    Break free from the pack and join the professional minority with an approach that raises your odds for long term prosperity.

You May Also Like

Hot Definitions
  1. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  2. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  3. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  4. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  5. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  6. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
Trading Center