DuPont analysis
Breaking return on equity into three factors: margin, asset turnover and leverage.
Formula
ROE = \frac{\text{Profit}}{\text{Revenue}} \times \frac{\text{Revenue}}{\text{Assets}} \times \frac{\text{Assets}}{\text{Equity}}All factors are fractions of one over the same period. The product cancels down to profit over equity, so the identity is exact rather than approximate.
How to read the number
Shows where a high return came from: margin, speed of turnover, or simply debt.
When the metric lies
The same return with different factors means different risk. The last factor rises with debt, so a high figure is sometimes a sign of fragility.
Also known as: dupont formula