Break ROE Before You Praise It
Use DuPont analysis to identify the driver behind a change in return on equity.
ROE is a headline. DuPont is the explanation. The mechanism DuPont analysis decomposes ROE into three levers: profit margin, asset turnover, and leverage. The formula forces you to ask whether returns came from earning more on sales, using assets more efficiently, or financing the asset base with less equity. Why it works The same ROE can come from very different business models. A luxury brand may rely on high margins and low turnover. A grocer may rely on low margins and high turnover. A levered company may show attractive ROE while carrying higher financial risk. The decomposition prevents you from…
Sign up free — one personalized lesson every day, matched to your role and goals.
Already have an account? Sign in