DuPont The ROE Story
Use DuPont decomposition to identify the source and quality of ROE improvement.
A company reports ROE rising from 14% to 19%. Net margin is 8.0%, asset turnover is 1.1x, and assets/equity is 2.16x this year. Last year: margin 8.2%, turnover 1.2x, assets/equity 1.42x. DuPont: ROE = net margin x asset turnover x equity multiplier The common trap is calling higher ROE "better quality" before checking whether operations improved or leverage increased. Compute last year 8.2% x 1.2 x 1.42 = 14.0% ROE. This gives the base-year return split across profitability, efficiency, and leverage. Compute this year 8.0% x 1.1 x 2.16 = 19.0% ROE. The headline ROE improved, but margin and turnover…
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