FINANCE / ROE DRIVERS
Decompose return on equity into profit margin, asset turnover, and the equity multiplier.
METHOD / WORKED EXAMPLE
DuPont analysis separates profitability, asset use, and financial leverage instead of presenting ROE as one unexplained percentage.
WORKED DEFAULT
With $120,000 net income, $1,200,000 revenue, $800,000 average assets, and $400,000 average equity, margin is 10%, turnover is 1.5, multiplier is 2, and ROE is 30%.
READ THE RESULT
Compare the components over aligned periods. The same ROE can come from very different margins, asset intensity, and equity financing.
ASSUMPTIONS AND LIMITS
Accounting classifications, averages, negative equity, and one-off items can make comparisons misleading.
COMMON QUESTIONS
Income and revenue cover a period, while asset and equity balances are points in time. Using opening-and-closing averages better aligns the balance-sheet values with the period flow, though more frequent averages may be preferable when balances change sharply.
A larger multiplier means more assets relative to equity and often more financing leverage. It can increase ROE while also increasing financial risk, so read it with debt, interest coverage, liquidity, and cash-flow measures.
Differences can come from using average versus closing equity, continuing versus total income, rounding, minority interests, or different accounting classifications. Align definitions before comparing results.
RELATED TOOLS
Use boundary
The calculator multiplies net profit margin, asset turnover, and equity multiplier; the intermediate revenue and asset terms cancel to net income divided by average equity.
ROE = (net income / revenue) x (revenue / average assets) x (average assets / average equity).