How DuPont turns one ratio into three drivers
Return on equity tells you how much profit a company earns on each dollar of shareholders’ capital, but on its own it hides why the number is what it is. DuPont analysis splits ROE into a chain of three ratios — profitability, efficiency, and leverage — that multiply back together to recover ROE exactly. Because revenue and total assets appear on both the top and bottom of the chain, they cancel algebraically, which is why the product always returns to net income over equity. The payoff is diagnostic: instead of a single figure you get a profile of how the business actually generates its returns. You can dig into the first lever with theROE calculatorand combine the first two with theROA calculator.
The three-step DuPont formula
ROE = Net margin × Asset turnover × Equity multiplier
= (Net income / Revenue) × (Revenue / Assets) × (Assets / Equity)
where net margin measures profitability, asset turnovermeasures how efficiently assets generate revenue, and theequity multiplier (Assets ÷ Equity) measures leverage. Revenue and assets cancel across the chain, so the product collapses back toNet income ÷ Equity — return on equity.
What makes this calculator different
- It shows all three levers at once. Net margin, asset turnover, and the equity multiplier are displayed side by side, then multiplied through so you can see exactly how they combine into ROE.
- It surfaces ROA along the way. The first two factors — net margin × asset turnover — are return on assets, so the breakdown makes the ROA-to-ROE step explicit rather than burying it.
- It reveals leverage-driven versus operations-driven ROE.By isolating the equity multiplier you can tell whether a high ROE is earned through strong operations or simply amplified by borrowing — a distinction that matters for how risky those returns are.
Frequently asked questions
What is DuPont analysis?+
DuPont analysis is a framework for understanding return on equity (ROE) by breaking it into the underlying business drivers rather than treating it as a single number. It was developed at the DuPont Corporation in the 1920s as a way to see why a company earns the returns it does. Instead of just asking how high ROE is, the method asks where that ROE comes from — profitability, operating efficiency, or leverage. That decomposition makes it far easier to compare companies and to spot what is really moving returns over time.
What is the three-step DuPont formula?+
The three-step DuPont formula expresses ROE as the product of three ratios: ROE = net profit margin × asset turnover × equity multiplier. Written out, that is (Net income ÷ Revenue) × (Revenue ÷ Total assets) × (Total assets ÷ Shareholders’ equity). When you multiply the three fractions, revenue and assets cancel, collapsing the expression back to Net income ÷ Equity — which is ROE. The value of the formula is not the algebra but the three separate levers it exposes.
What does each factor tell you?+
Net profit margin measures profitability — how many cents of profit the company keeps from each dollar of revenue. Asset turnover measures efficiency — how much revenue the company generates from each dollar of assets it controls. The equity multiplier measures financial leverage — how large the asset base is relative to the equity funding it, which rises as a company takes on more debt. Together they describe a business that earns its ROE by being profitable, by being efficient with its assets, by borrowing heavily, or by some mix of the three.
Why is decomposing ROE useful?+
Two companies can report the identical ROE for completely different reasons, and the decomposition reveals which. A high-margin software firm might reach 20% ROE on fat margins and low leverage, while a thin-margin retailer reaches the same 20% through rapid asset turnover, and a bank might get there mainly through heavy leverage. Knowing which lever is doing the work tells you how durable and how risky that ROE is — leverage-driven returns, in particular, amplify both gains and losses. The breakdown also makes trend analysis sharper, because you can see exactly which factor is rising or falling.
What is the difference between the 3-step and 5-step DuPont?+
The three-step model splits ROE into net margin, asset turnover, and the equity multiplier. The five-step (or extended) model goes further by breaking net profit margin into its own components: it separates out the tax burden (net income ÷ pre-tax income) and the interest burden (pre-tax income ÷ operating income), leaving operating margin as a third piece. This lets analysts see how much of profitability is operational versus how much is shaped by financing costs and taxes. The five-step version is more granular, but the three-step model captures the core intuition and is what this calculator focuses on.
Disclaimer: This calculator is foreducation and illustration only. DuPont analysis is a framework built from reported accounting figures, which can be affected by one-off items, accounting choices, and differences between industries; its output is not a verdict on a company’s value. Nothing here is investment, tax, or trading advice.