DuPont analysis
A framework that breaks down return on equity into three components — profit margin, asset turnover, and leverage — to identify the drivers of profitability.
Example
“DuPont analysis revealed the retailer's high ROE came from leverage, not operational efficiency — a red flag.”
Memory Tip
DUPONT analysis = ROE = margin × turnover × leverage. Find out WHY ROE is high or low.
Why It Matters
DuPont analysis helps you understand what actually drives a company's profitability beyond just looking at the bottom line number. By breaking down return on equity into three separate components, you can identify whether a company makes money through high profit margins, efficient asset use, or financial leverage, which affects your investment decisions.
Common Misconception
Many people think DuPont analysis is only useful for professional investors or accountants, but it is actually a practical tool for anyone evaluating whether a company or business is truly performing well. A high ROE might look impressive until you break it down and discover it comes entirely from excessive debt rather than operational efficiency.
In Practice
Imagine Company A and Company B both have a 15 percent ROE. Using DuPont analysis, you discover Company A achieves this through a 10 percent profit margin, 1.5 times asset turnover, and 1 times leverage. Company B has a 5 percent profit margin, 1 times asset turnover, and 3 times leverage, meaning it relies heavily on debt. Company A appears like the safer, more sustainable investment because its profitability comes from operations rather than borrowed money.
Etymology
Developed by the DuPont Corporation in the 1920s to evaluate business unit performance.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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