04 // Interactive Formula Compendium // FINANCEROE = (Net Income / Revenue) × (Revenue / Assets) × (Assets / Equity)
DuPont ROE Identity (3-Step & 5-Step Return on Equity Decomposition)
The 3-step DuPont Identity factors Return on Equity (Net Income / Shareholders' Equity) into Net Profit Margin × Total Asset Turnover × Financial Leverage Multiplier, revealing how a company generates equity returns.
Formula Reference
Main Formula
ROE = (Net Income / Revenue) × (Revenue / Assets) × (Assets / Equity)
Rearranged Forms
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier (3-Step DuPont)
ROA = (Net Income / Revenue) × (Revenue / Assets) = Net Income / Assets
ROE_5step = (NI/EBT) × (EBT/EBIT) × (EBIT/Rev) × (Rev/Assets) × (Assets/Equity)
Variables & Units
| Symbol | Name | Unit |
|---|---|---|
| ROE | Return on Equity (%) | % |
| netIncome | Net Income | USD M |
| revenue | Annual Revenue / Sales | USD M |
| assets | Average Total Assets | USD M |
| equity | Average Shareholders' Equity | USD M |
Inputs & Parameters
[USD M]
[USD M]
[USD M]
[USD M]
Calculated Result (Return on Equity (%))
ROE =30%
Formula Notes & Background
- Start with the definition of Return on Equity: ROE = Net Income / Equity.
- Multiply numerator and denominator by Revenue and by Total Assets: ROE = (Net Income / Revenue) × (Revenue / Assets) × (Assets / Equity).
- Recognize the three ratios as Net Profit Margin, Asset Turnover, and the Equity Leverage Multiplier.
Step-by-Step Examples
#1: Decompose ROE for a company with $120M Net Income, $1,000M Revenue, $800M Assets, and $400M Equity.
Net Margin = 120/1000 = 12%Asset Turnover = 1000/800 = 1.25×Equity Multiplier = 800/400 = 2.0×
ROE = 12.0% × 1.25 × 2.0 = 15.0% (ROA) × 2.0
→ ROE = 30.0%
#2: Compare a high-margin luxury brand (20% margin, 0.75× turnover, 1.5× leverage) vs. a grocery chain (2.5% margin, 4.0× turnover, 2.25× leverage).
Luxury: 0.20 × 0.75 × 1.5Grocery: 0.025 × 4.0 × 2.25
Both products evaluate to 0.225
→ Both achieve 22.5% ROE through completely different business models
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Frequently Asked Questions
Why is a high ROE driven by the Equity Multiplier riskier than one driven by Net Margin or Asset Turnover?+
Because Assets / Equity = 1 + (Debt / Equity), boosting ROE via leverage amplifies bankruptcy risk and interest burden during downturns, whereas margin and turnover reflect operational excellence.
What does the 5-step DuPont formula add over the 3-step formula?+
It splits Net Profit Margin into Operating EBIT Margin (EBIT/Revenue), Interest Burden (EBT/EBIT), and Tax Burden (NI/EBT) to isolate operational margins from debt interest and taxes.
When was the DuPont Identity invented?+
It was created in 1912 by electrical engineer Donaldson Brown at the DuPont Corporation to audit General Motors' operating efficiency.