{"id":4200,"date":"2019-03-06T23:38:51","date_gmt":"2019-03-06T23:38:51","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=4200"},"modified":"2026-03-25T17:38:34","modified_gmt":"2026-03-25T17:38:34","slug":"dupont-analysis-return-equity","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/dupont-analysis-return-equity\/","title":{"rendered":"DuPont Analysis of Return on Equity"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Financial Analysis Techniques (2025 Level I CFA\u00ae Exam \u2013 FRA \u2013 Module 6)\",\n  \"description\": \"The video lesson covers financial statement analysis techniques, including tools and limitations, key financial ratios (activity, liquidity, solvency, profitability, valuation), and their interrelationships. It explores DuPont analysis of return on equity, segment reporting requirements, segment ratios, and the use of ratio analysis for modeling and forecasting earnings.\",\n  \"uploadDate\": \"2022-04-22T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/example.com\/path-to-thumbnail.jpg\",\n  \"contentUrl\": \"https:\/\/youtu.be\/n-tgI2uEev4\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/n-tgI2uEev4\",\n  \"duration\": \"PT59M43S\"\n}\n<\/script>\n\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"ImageObject\",\n  \"url\": \"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/03\/page-131.jpg\",\n  \"caption\": \"DuPont Analysis\",\n  \"width\": 1806,\n  \"height\": 1681,\n  \"copyrightNotice\": \"\u00a9 2024 AnalystPrep\",\n  \"acquireLicensePage\": \"https:\/\/analystprep.com\/license-info\",\n  \"creditText\": \"AnalystPrep Design Team\",\n  \"creator\": {\n    \"@type\": \"Organization\",\n    \"name\": \"AnalystPrep\"\n  }\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Given the following financial data on a company, what is the company\u2019s ROE?\",\n    \"text\": \"Given the following financial data on a company: Net income = 50,000; Revenue = 285,000; Average total assets = 1,000,000; Average shareholder\u2019s equity = 600,000. What is the company\u2019s ROE?\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is B. The return on equity (ROE) is 8.33%. Using the DuPont decomposition, ROE = (Net income \/ Revenue) \u00d7 (Revenue \/ Average total assets) \u00d7 (Average total assets \/ Average shareholder\u2019s equity). Substituting the values gives ROE = (50,000 \/ 285,000) \u00d7 (285,000 \/ 1,000,000) \u00d7 (1,000,000 \/ 600,000) \u2248 0.0833, or 8.33%.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/n-tgI2uEev4?si=sC_GTKKKDStBIoQR\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n\n<p>Return on Equity (ROE), i.e., net income divided by average shareholders\u2019 equity, measures the return that a company generates on its equity capital.<\/p>\n\n\n\n<p>DuPont analysis is a technique that can be used to decompose ROE into its constituent parts. The process involves the expression of the basic ratio as the product of component ratios. This decomposition is useful in the determination of the reasons for changes in ROE over time for a given company. It also demystifies the differences in ROE for different companies in a given time period.<\/p>\n\n\n\n<div style=\"text-align:center; background:#f3f5f9; padding:20px 16px; margin:24px 0;\">\n  <div style=\"max-width:720px; margin:0 auto;\">\n    <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"\n       style=\"display:block; width:100%; padding:10px 18px; border:2px solid #2f6fdd; border-radius:999px; color:#2f6fdd; text-decoration:none; font-size:15px; font-weight:500; line-height:1.2; text-align:center;\">\n      Practice DuPont analysis for CFA Level I with a Free Trial.\n    <\/a>\n  <\/div>\n<\/div>\n\n\n<p>The figure below illustrates the idea behind DuPont&#8217;s analysis.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-17082 size-full\" style=\"max-width: 100%;\" src=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/03\/page-131.jpg\" alt=\"dupont-analysis\" width=\"1806\" height=\"1681\" srcset=\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/03\/page-131.jpg 1806w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/03\/page-131-300x279.jpg 300w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/03\/page-131-768x715.jpg 768w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/03\/page-131-1024x953.jpg 1024w, https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2019\/03\/page-131-400x372.jpg 400w\" sizes=\"auto, (max-width: 1806px) 100vw, 1806px\" \/><\/p>\n<h2><strong>Application of Dupont Analysis<\/strong><\/h2>\n<p>There are several methods for decomposing ROE using simple algebra.<\/p>\n<h3><strong>Method 1:<\/strong><\/h3>\n<p>$$\\begin{align}\\text{ROE} &amp;= \\frac{\\text{Net income}}{ \\text{Average shareholders&#8217; equity}}\\\\ &amp;= \\left(\\frac{\\text{Net income}} {\\text{Average total assets}}\\right)\\times \\left(\\frac{\\text{Average total assets}}{\\text{Average shareholders&#8217; equity}}\\right)\\end{align}$$<\/p>\n<p>Therefore<\/p>\n<p>$$\\text{ROE} = \\text{Return on Assets (ROA)} \\times \\text{Leverage}$$<\/p>\n<p>This implies that when a company uses leverage, a higher ROA will lead to a higher ROE.<\/p>\n<h3><strong>Method 2:<\/strong><\/h3>\n<p>$$\\begin{align}\\text{ROE} &amp;= \\frac{\\text{Net income}}{\\text{Average shareholders&#8217; equity}}\\\\ &amp;= \\left(\\frac{\\text{Net income}}{ \\text{Revenue}}\\right) \\times\u00a0 \\left(\\frac{\\text{Revenue} }{\\text{Average total assets}}\\right)\\times \\left(\\frac{\\text{Average total assets}}{\\text{Average shareholders\u2019 equity}}\\right)\\end{align}$$<\/p>\n<p>Which is interpreted as:<\/p>\n<p>$$\\text{ROE} = \\text{Net profit margin} \\times \\text{Total asset turnover}\\times \\text{Leverage}$$<\/p>\n<p>This tells us that when a company uses leverage, a higher asset turnover and net profit margin will lead to a higher return on equity.<\/p>\n<h3><strong>Method 3:<\/strong><\/h3>\n<p>To further separate the effects of taxes and interest, the net profit margin can further be decomposed leading to:<\/p>\n<p>$$\\begin{align}\\text{ROE} = &amp;\\frac{\\text{Net income}}{\\text{Average shareholders\u2019 equity}}\\\\= &amp;\\left(\\frac{\\text{Net income}}{ \\text{EBT}}\\right) \\times \\left(\\frac{\\text{EBT}}{\\text{EBIT}}\\right) \\times \\left(\\frac{\\text{EBIT}}{ \\text{Revenue}}\\right) \\times\\\\ &amp;\\left(\\frac{\\text{Revenue}}{\\text{Average total assets}}\\right) \\times \\left(\\frac{\\text{Average total assets}}{\\text{Average shareholders\u2019 equity}}\\right)\\\\ &amp; = \\text{Tax burden}\\times \\text{Interest burden} \\times \\text{EBIT margin}\\times \\text{Total asset turnover} \\times \\text{Leverage} \\end{align}$$<\/p>\n<p>This 5-way decomposition is the Dupont Analysis method that is found in financial databases such as Bloomberg.<\/p>\n<blockquote>\n<h3><strong>Question 1<\/strong><\/h3>\n<p>Given the following financial data on a company, what is the company\u2019s ROE?<\/p>\n<p>$$\\begin{array} {ll}\\\\ \\text{Net income}&amp;50,000\\\\ \\text{Revenue}&amp;2,85,000\\\\ \\text{Average total assets}&amp;1,000,000\\\\ \\text{Average shareholder&#8217;s equity}&amp; 600,000\\\\ \\end{array}$$<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">5.29%<\/li>\n<li data-tadv-p=\"keep\">8.33%<\/li>\n<li data-tadv-p=\"keep\">1.14%<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>B<\/strong>.<\/p>\n<p>$$\\begin{align}\\text{ROE} &amp;= \\left(\\frac{\\text{Net income}}{\\text{Revenue}}\\right) \u00d7 \\left(\\frac{\\text{Revenue}}{\\text{Average total assets}}\\right) \u00d7 \\left(\\frac{\\text{Average total assets}}{\\text{Average shareholders&#8217; equity}}\\right)\\\\&amp;= \\frac{50,000}{285,000} \u00d7 \\frac{285,000}{1,000,000} \u00d7 \\frac{1,000,000}{600,000} = 0.1754 \u00d7 0.285 \u00d7 1.667 = 8.33\\%.\\end{align}$$<\/p>\n<\/blockquote>\n<p>\u00a0<\/p>\n\n\n<div style=\"text-align:center; background:#f3f5f9; padding:44px 20px 26px; margin:40px 0;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"\n     style=\"display:inline-block; background:#4274d8; color:#ffffff; text-decoration:none; padding:16px 36px; border-radius:999px; font-size:16.5px; font-weight:700; line-height:1;\">\n    Start Free Trial\n  <\/a>\n\n  <p style=\"max-width:640px; margin:18px auto 0; font-size:16px; line-height:1.5; color:#1f2937;\">\n    Strengthen ROE analysis with structured practice and\n    exam-focused CFA Level I questions.\n  <\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Return on Equity (ROE), i.e., net income divided by average shareholders\u2019 equity, measures the return that a company generates on its equity capital. DuPont analysis is a technique that can be used to decompose ROE into its constituent parts. The&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5],"tags":[],"class_list":["post-4200","post","type-post","status-publish","format-standard","hentry","category-financial-reporting-and-analysis","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>DuPont Analysis &amp; ROE Decomposition | CFA Level 1<\/title>\n<meta name=\"description\" content=\"DuPont analysis breaks ROE into components, showing how profitability, efficiency, and leverage contribute to returns. 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