What Is the DuPont Identity?

The DuPont identity is an expression that shows a company's return on equity (ROE) can be represented as a product of three other ratios: the profit margin, the total asset turnover, and the equity multiplier. 

Understanding the DuPont Identity

The DuPont identity, commonly known as DuPont analysis, comes from the DuPont Corporation, which began using the idea in the 1920s. DuPont identity tells us th♊at ROE is affected by three things:

1. 澳洲幸运5开奖号码历史查询:Operating efficiency, which is measured by profit margin;

2. 澳洲幸运5开奖号码历史查询:Asset use efficiency, which is measured by total asset turnover; and

3. 澳洲幸运5开奖号码历史查询:Financial leverage, which is measured by the equity multiplier.

The formula for the DuPont identity is:

ROE = profit margin x asset turnover x equity multiplier

This foﷺrmula, in turn, can be broken down further to:

ROE = (net income / sales) x (revenue / total assets) x (total assets / shareholder equity)

DuPont Identity Example Calculation

Assume a com𝓡pany reports the following fi꧃nancial data for two years:

澳洲幸运5开奖号码历史查询: Year one net income = $180,000

澳洲幸运5开奖号码历史查询: Year one revenues = $300,000

澳洲幸运5开奖号码历史查询: Year one total assets = $500,000

澳洲幸运5开奖号码历史查询: Year one shareholder equity = $900,000

澳洲幸运5开奖号码历史查询: Year two net income = $170,000

澳洲幸运5开奖号码历史查询: Year two revenues = $327,000

澳洲幸运5开奖号码历史查询: Year two total assets = $545,000

澳洲幸运5开奖号码历史查询: Year two shareholder equity = $980,000

Using the DuPont identity, the RওOE fo🐽r each year is:

ROE year one = ($180,000 / $300,000) x ($300,000 / $500,000) x ($500,000 / $900,000) = 20%

ROE year two = ($170,000 / $327,000) x ($327,000 / $545,000) x ($545,000 / $980,000) = 17%

With a slight amount of rounding, the above 𒊎two ROE calculations break do🌃wn to:

澳洲幸运5开奖号码历史查询: ROE year one = 60% x 60% x 56% = 20%

澳洲幸运5开奖号码历史查询: ROE year two = 52% x 60% x 56% = 17%

You can clearly see that the ROE declined in year two. During the year, net income, revenues, total assets, and shareholder equity൩ all changed in value. ♐By using the DuPont identity, analysts or managers can break down the cause of this decline. Here they see the equity multiple and total asset turnover remained exactly constant over year two. This leaves only the profit margin as the cause of the lower ROE. Seeing that the profit margin dropped from 60 percent to 52 percent, while revenues actually increased in year two, indicates that there are issues with the way the company handled its expenses and costs throughout the year. Managers can then use these insights to improve the following year.