The DuPont Analysis is a method of breaking down a company’s return on equity to better understand the drives behind the company’s return on equity. DuPont Analysis helps identify problem areas within a business that can then be individually corrected to enhance the value of return on equity. The formula for the analysis is:
Return on equity = profit margin x asset turnover x equity multiplier
This breaks down further to:Return on equity = (net income / sales) x (sales / assets) x (assets / equity)
Once the return on equity is broken down in this way, it is easy for management to determine what areas of the business need improvement to increase the firm’s return on equity.