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. Asset

    1. A resource with economic value that an individual, corporation ...
  5. Leverage

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

    A ratio of profitability calculated as net income divided by ...
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. how to use DuPont analysis to break apart ROE and get a much better understanding about where movements in ROE are coming from.
    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. Active Trading Fundamentals

    What is liquidity risk?

    Learn how to distinguish between the two broad types of financial liquidity risk: funding liquidity risk and market liquidity risk.
  7. Active Trading Fundamentals

    What does the gearing ratio say about risk?

    Find out why lenders and investors pay close attention to a firm's gearing ratios, and why both too much and too little borrowing can be risky.
  8. Mutual Funds & ETFs

    How do hedge funds determine what assets to own?

    Learn about the various types of investments that hedge fund managers use, and explore basic hedge fund management trading strategies.
  9. Personal Finance

    What is a P&L statement used for?

    Discover how the profit and loss statement is used by investors, accountants and business managers to assess the health and business practices of a company.
  10. Investing Basics

    What is the difference between a P&L statement and a balance sheet?

    Take a deeper look at the differences between the profit and loss statement and the balance sheet, two of the most important financial accounting documents.

You May Also Like

Hot Definitions
  1. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  2. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  3. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  4. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  5. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center