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Finance · level 2

DuPont and ROIC

Split any return on equity into three drivers you can attack separately: how much you keep, how hard the assets work, and how much of it is borrowed.

Theory: Accounting & Financial Statements

Worked example: Net margin 6%, asset turnover 1×, equity multiplier 2×. ROE?

ROA6%
leverage2×
ROE12%

Step by step

  1. 1

    DuPont

    ROE = margin × asset turnover × equity multiplier

  2. 2

    ROA first

    6% × 1 = 6%

  3. 3

    Lever it

    6% × 2 = 12%

  4. 4

    So what

    Two firms with the same ROE can differ entirely — one earns it, the other borrows it.

Net margin 6%, asset turnover 1×, equity multiplier 2×. ROE? = 12

The theory behind it

Intuition

DuPont splits ROE into margin, asset turnover and leverage, so you can say why returns moved rather than just that they moved.

Common pitfalls

  • ×Reading rising ROE as improvement when it is only more debt.
  • ×Mixing period-end and average balance-sheet figures.

In the interview

Profitability cases: the first cut at whether the problem is price, volume or the balance sheet.