The DuPont Analysis is an approach that breaks down ROE (Return on Equity) into a function of 3 or 5 ratios that helps to see the impact of each ratio on ROE.

Suppose you are going through the financial ratios of our company and stop at ROE and wondering what are the factors that are contributing or impacting the ROE. You called your accountant and asked him to find the means through which factors impacting ROE can be tracked. Considering your concern, the accountant is explaining you the two variants of DuPont Analysis.

• The three part approach

• The extended five part approach

## Original Formula for ROE

Now multiply (Revenue/Revenue) with the above mentioned formula and re-arrange the terms

Now multiply (Total Assets/Total Assets) and re-arrange the terms

If we further breaks down the Net Profit Margin, it becomes the extended five part DuPont equation.

Therefore the extended DuPont equation is

## Procedure for three-part Approach

Step 1: Calculate the Net Profit Margin

Step 2: Calculate the Asset Turnover Ratio

Step 3: Calculate the Financial Leverage

Step 4: Finally multiply all the three ratios to calculate the ROE

## Procedure for five-part Approach

Step 1: Calculate the Tax Burden

Step 3: Calculate the EBIT Margin

Step 4: Calculate the Asset Turnover Ratio

Step 6: Finally multiply the entire above calculated ratio together to get the ROE