Decompose ROE with DuPont
Use the three-part DuPont formula to identify whether ROE is driven by margin, asset efficiency, or leverage.
A business unit reports 18% ROE with 6% net margin, 1.5x asset turnover, and 2.0x equity multiplier. DuPont ROE = net profit margin x asset turnover x equity multiplier The common trap is to call 18% ROE healthy without checking whether it comes from durable margin, efficient assets, or leverage. Calculate margin driver Net margin is 6%, meaning $0.06 of profit for every $1 of sales. This is the profitability layer. A weak margin points to pricing, mix, or cost issues. Calculate asset efficiency Asset turnover is 1.5x, meaning $1.50 of sales for every $1 of assets. This shows how…
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