Formula
The DuPont identity splits return on equity into factors that multiply back to it exactly. The three-step form uses net margin, asset turnover and the equity multiplier. The five-step form replaces net margin with the tax burden (net income ÷ pretax income), the interest burden (pretax income ÷ EBIT) and the EBIT margin. The tool recomputes ROE as net income ÷ equity and as the product of the factors so a data entry slip shows up.
When to use it
Use it to form or test an expectation in analytical procedures, to explain a change in return to a client finance team, and to see whether profit improved through operations, financing or tax. It pairs with the financial ratio calculator for turnover days and with the analytical procedures tool for thresholds.
Limits
Ratios depend on the accounting policies and period end used, so compare like with like. One-off items in net income, EBIT definitions that differ between companies, and seasonality distort the factors. The decomposition explains arithmetic, not cause. Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What is the DuPont formula?
Three-step: ROE = net income ÷ sales × sales ÷ total assets × total assets ÷ equity, which is net profit margin × asset turnover × equity multiplier. Five-step: ROE = (net income ÷ pretax income) × (pretax income ÷ EBIT) × (EBIT ÷ sales) × (sales ÷ assets) × (assets ÷ equity), which separates the tax burden, interest burden and EBIT margin.
Should I use average or year-end balances?
Income statement items cover a period, so many analysts divide by the average of opening and closing assets and equity. Year-end balances are common in quick comparisons. Pick one and use it for the current and the comparison period. The tool lets you switch.
What does a rising equity multiplier tell me?
ROE can rise because the entity borrowed more, not because it earned more on its assets. If the equity multiplier rises while margin and turnover are flat, the improvement came from leverage and brings more financial risk. The five-step version also shows whether higher interest costs are offsetting it through the interest burden.
How does this help in an audit?
A DuPont breakdown gives a structured expectation for an analytical procedure under AU-C 520: AU-C 520 describes analytical procedures as evaluating financial information through analysis of plausible relationships among financial and nonfinancial data. Compare each factor to the prior year and to what you know about the business, and investigate the factor that moved without a business explanation.
What if equity is negative or sales are zero?
The tool shows a dash for any ratio with a zero denominator and warns when assets, sales or equity are zero or negative. With negative equity the equity multiplier and ROE reverse sign and the decomposition no longer reads like a normal one.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.