Blog · Finance metrics and formulas · Finance and FP&A teams
Du Pont analysis separates return on equity into profit margin, asset turnover and financial leverage. Work through two years of financial statements, prove the identity and reconcile the change in ROE.
Du Pont analysis breaks return on equity into net profit margin, asset turnover and the equity multiplier. It explains whether a change in ROE came from earning more on sales, generating more sales from assets, or using a smaller equity base relative to assets. Each component comes from the same financial statement workbook, and their product must equal ROE calculated directly.
ROE = Net profit margin × Asset turnover × Equity multiplier
ROE = (Net income / Revenue) × (Revenue / Average assets) × (Average assets / Average equity)
Net profit margin measures profit after all expenses relative to revenue. Asset turnover measures revenue generated per dollar of assets. The equity multiplier measures assets supported by each dollar of equity. The CFA Institute's financial analysis reading describes DuPont analysis as breaking ROE into components that indicate different aspects of performance.
Revenue cancels between the first two fractions. Average assets cancels between the last two. What remains is net income divided by average equity, which is the direct ROE calculation. This identity is the check that holds the analysis together.
Use the broader financial ratios overview for liquidity and other profitability measures. This decomposition answers a narrower question: why did this company's return on equity change?
Pull revenue and net income for each complete fiscal year from the income statement. Pull opening and closing total assets and shareholders' equity from the balance sheet. Keep the legal entity, consolidation scope, reporting currency and accounting basis the same throughout.
The SEC's guide to financial statements distinguishes income statements, which cover a period, from balance sheets, which show balances at a point in time. That difference is why the denominator here uses average balances.
For an illustrative US distributor, the source workbook contains:
| Statement input (USD) | Fiscal 2025 | Fiscal 2026 |
|---|---|---|
| Revenue | 8,000,000 | 9,000,000 |
| Net income | 480,000 | 630,000 |
| Opening total assets | 4,000,000 | 4,800,000 |
| Closing total assets | 4,800,000 | 5,200,000 |
| Opening shareholders' equity | 2,000,000 | 2,400,000 |
| Closing shareholders' equity | 2,400,000 | 1,600,000 |
Opening balances in the second year equal closing balances in the first. Tie these amounts to the signed financial statements before calculating ratios. Where a restatement changes the comparative year, use the restated balances consistently.
This example uses total net income and total equity on the same consolidated basis, with no preferred stock or noncontrolling interests. For a common-shareholder analysis, match income attributable to common shareholders with the corresponding common-equity denominator. Do not mix the two scopes.
Average each opening and closing balance. Then divide the income statement amounts by the matching averages:
| Calculation | Fiscal 2025 | Fiscal 2026 |
|---|---|---|
| Average assets (USD) | (4,000,000 + 4,800,000) / 2 = 4,400,000 | (4,800,000 + 5,200,000) / 2 = 5,000,000 |
| Average equity (USD) | (2,000,000 + 2,400,000) / 2 = 2,200,000 | (2,400,000 + 1,600,000) / 2 = 2,000,000 |
| Net margin | 480,000 / 8,000,000 = 6.00% | 630,000 / 9,000,000 = 7.00% |
| Asset turnover | 8,000,000 / 4,400,000 = 1.8182 | 9,000,000 / 5,000,000 = 1.8000 |
| Equity multiplier | 4,400,000 / 2,200,000 = 2.0000 | 5,000,000 / 2,000,000 = 2.5000 |
| Direct ROE | 480,000 / 2,200,000 = 21.82% | 630,000 / 2,000,000 = 31.50% |
Keep full precision in the workbook; displayed ratios are rounded. Using unrounded inputs, 2025's product is 0.06 × (8,000,000 / 4,400,000) × 2 = 21.81818%. For 2026, 0.07 × 1.8 × 2.5 = 31.50%. Both equal the direct calculation.
The margin component uses net profit margin, after financing and tax expenses. Substituting gross margin breaks the ROE identity because gross profit is a different numerator.
ROE rose by 31.50% minus 21.81818%, or 9.68182 percentage points. To allocate that movement, choose an order and replace one driver at a time. Here the sequence is margin, then turnover, then leverage:
| Bridge step | Calculation | ROE | Change (percentage points) |
|---|---|---|---|
| Starting position | 2025 margin × 2025 turnover × 2025 multiplier | 21.81818% | — |
| Replace margin | 7% × (8,000,000 / 4,400,000) × 2 | 25.45455% | +3.63636 |
| Replace turnover | 7% × 1.8 × 2 | 25.20000% | −0.25455 |
| Replace multiplier | 7% × 1.8 × 2.5 | 31.50000% | +6.30000 |
| Total movement | Ending ROE minus starting ROE | +9.68182 |
The displayed contributions sum to 9.68181 points because of rounding; the unrounded contributions reconcile exactly. Calculate a residual as ending ROE minus starting ROE minus the sum of all driver changes. It must be zero before rounding.
Replacing factors in another order reallocates their interaction effects. It does not change total ROE. State the order in the report and keep it consistent between reporting periods.
Margin improved, but asset turnover slipped slightly. The largest contribution to the ROE increase came from the equity multiplier. That is a reason to inspect the equity rollforward, including distributions, repurchases and capital contributions, before celebrating improved operating performance.
Finance owns the reconciliation. Operating leaders investigate margin and asset use, while treasury and the controller explain financing and equity movements. Use the debt-to-equity ratio for the separate debt relationship: the equity multiplier includes all assets and is not a direct measure of interest-bearing debt.
Bring a financial statement workbook with revenue, net income, assets and equity for matching periods. Covirage maps the columns, and its tools compute the components and check that their product reconciles to direct ROE; the external AI model explains the results with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.
See Covirage for finance teams for the supporting reporting context.
Net income and revenue cover a period, while assets and equity are balances at a date. Average balances better match the resources employed during that period. Opening and closing balances are a starting point; monthly averages help when acquisitions, distributions or seasonal movements are material.
Yes. A larger equity multiplier raises ROE when the other components stay positive and unchanged. That increase does not demonstrate stronger margins or more efficient asset use. Review borrowing, distributions and changes in the equity base before describing a higher ROE as an operating improvement.
The arithmetic can still produce a number when average equity is negative, but the usual economic interpretation breaks down. A loss divided by negative equity can look positive. Show the underlying income and equity amounts and explain the capital position instead of ranking that ROE against ordinary peers.