DuPont formula (also known as the DuPont analysis, DuPont Model, DuPont equation or the DuPont method) is a method for assessing a company's return on equity (ROE) breaking its into three parts. The name comes from the DuPont Corporation that started using this formula in the 1920s.
ROE (DuPont formula) = (Net profit / Revenue) * (Revenue / Total assets) * (Total assets / Equity) = Net profit margin * Asset Turnover * Financial leverage
DuPont model tells that ROE is affected by three things:
- Operating efficiency, which is measured by net profit margin;
- Asset use efficiency, which is measured by total asset turnover;
- Financial leverage, which is measured by the equity multiplier;
If ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming.