The DuPont equation breaks down return on equity (ROE) into three components: profit margin (PM), asset turnover (AT), and equity multiplier (EM). PM measures the percentage of revenues converted to net income, AT measures how efficiently assets generate revenue, and EM measures financial leverage through the use of debt. Together, analyzing these three factors provides insight into a company's profitability, asset efficiency, and financial stability.

1. ROE = PM * AT * EM
Where: ROE = Return on equity
ROE represents the percentage return on
dollars invested in the firm
ROE is important ratio to investors
The DuPont Equation

2. PM = Profit margin
PM = Net income/Total revenues
PM represents the percentage return on
total revenues
The higher the PM, the better
management is doing at controlling
costs
The DuPont Equation – Part 1 - PM
ROE = PM * AT * EM

3. AT = Asset turnover
AT = Total revenues/Total assets
Expressed as a number, the AT tells you how
many dollars in revenue is produced by each
dollar invested in assets.
A higher AT tells us that assets are being
managed efficiently
The DuPont Equation – Part 2 - AT

4. EM = Equity multiplier
EM = Total assets/Total equity
If rearranged, EM = 1+(Total
liabilities/Total equity)
EM is a financial leverage measure; the
higher the EM, the more reliant the firm is
on debt
The DuPont Equation – Part 3 - EM

5. The DuPont Equation
 Quick and relatively simple way to measure the
financial health of a firm
 Profit margin tells you how effective management
is at controlling costs
 Asset turnover tells you how efficiently the assets
are being used
 Equity multiplier tells you how financially levered
the firm is; that is, it tells you how dependent the
firm is on raising capital with debt, rather than
equity. While there are advantages to debt, too
much debt can be problematic.