Diagnose an ROE change by walking through profit margin, asset turnover, and equity multiplier.
Board read ROE improved from 12% to 18%. The headline sounds good, but the board wants to know whether the improvement is operating quality or financial leverage. DuPont analysis prevents a high-return headline from hiding the driver that created it. DuPont path ROE = net margin x asset turnover x equity multiplier A stronger ROE can come from better pricing and cost control, better asset utilization, or more leverage. Each has a different risk profile. Shortcut Celebrate higher ROE. A driver-based conclusion, not a headline. A return measure is only as strong as the driver behind it. 01 Margin 02…
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