CFA Level II Exam · Integration of Financial Statement Analysis Techniques

DuPont Analysis and Ratio Interpretation in Integrated Cases

Updated 7 October 2026 · Fact-checked

DuPont analysis splits return on equity into drivers: profitability, efficiency and leverage in the 3-step version, and tax burden, interest burden, EBIT margin, turnover and leverage in the 5-step version. To solve a question, compute each component for each period or peer, compare them, and name which driver explains the change in ROE.

Understand Ratio and DuPont Analysis in Integrated Cases

ROE tells you what shareholders earned on their equity. It does not tell you why. DuPont analysis answers the why by writing ROE as a product of ratios, so a change in ROE can be traced to one or more components.

The 3-step DuPont uses net profit margin (profitability), total asset turnover (efficiency) and the equity multiplier (leverage). The 5-step DuPont splits net profit margin into three parts: the tax burden (NI ÷ EBT), the interest burden (EBT ÷ EBIT) and the EBIT margin (EBIT ÷ Sales). It keeps turnover and leverage as they were. The tax burden and interest burden are ratios below 1, so a lower value means more of profit is lost to tax or interest.

The key skill is separating operating performance from financing. EBIT margin and asset turnover describe the business. Leverage and interest burden describe financing. ROA, which equals the first four components multiplied together, excludes the equity multiplier (leverage on equity). But ROA is based on net income, so it is after interest and tax. A fall in ROA can come from a lower interest burden (a financing item) as well as from a lower EBIT margin or turnover. To isolate the operating return, use EBIT margin × asset turnover (which equals EBIT ÷ Assets). A company can raise ROE while ROA falls, simply by borrowing more. That is a common trap.

In an integrated case you are rarely asked only for the calculation. You are asked to interpret. Combine the DuPont result with liquidity ratios (current, quick, cash, cash conversion cycle) and solvency ratios (debt to equity, interest coverage). Then judge whether a higher ROE is sustainable and how it compares with peers. Use average balances if the vignette gives them. Otherwise use what is given and say which basis you used.

Key formulas to remember

3-step DuPont: ROE = (NI ÷ Sales) × (Sales ÷ Average total assets) × (Average total assets ÷ Average equity); Net profit margin × total asset turnover × equity multiplier.
5-step DuPont: ROE = (NI ÷ EBT) × (EBT ÷ EBIT) × (EBIT ÷ Sales) × (Sales ÷ Assets) × (Assets ÷ Equity); Tax burden × interest burden × EBIT margin × asset turnover × equity multiplier.
ROA from DuPont: ROA = NI ÷ Assets = Net profit margin × Asset turnover; Equals tax burden × interest burden × EBIT margin × turnover. It excludes the equity multiplier, but it is after interest and tax, so a fall in ROA can come from the interest burden (financing) as well as from EBIT margin or turnover. For the operating return, use EBIT margin × turnover.
Equity multiplier: Equity multiplier = Average total assets ÷ Average equity; A higher value means more debt financing. It raises ROE if ROA exceeds the cost of debt, and raises risk.
Cash conversion cycle: CCC = Days of inventory + Days of receivables − Days of payables; A shorter cycle means less cash tied up in working capital.
Liquidity ratios: Current ratio = Current assets ÷ Current liabilities; Quick ratio = (Cash + Marketable securities + Receivables) ÷ Current liabilities; Cash ratio = (Cash + Marketable securities) ÷ Current liabilities; Read them together with the cash conversion cycle.
Solvency ratios: Interest coverage = EBIT ÷ Interest expense; Debt-to-equity = Total debt ÷ Total equity; Check whether the definitions in the vignette match these.

How to solve Ratio and DuPont Analysis in Integrated Cases questions

Use this sequence for any DuPont or ratio-interpretation question in an item set.

1Read the question first to see whether it asks for a calculation, a driver of change, or a judgement about quality or risk.
2Find the data in the exhibits: income statement items (Sales, EBIT, interest, EBT, tax, NI) and balance sheet items (assets, equity). Note whether averages or year-end values are given.
3Choose 3-step or 5-step. Use 5-step when the question mentions tax, interest or EBIT margin, or when the cause of a change is unclear.
4Compute each component for every period or company being compared. Keep at least four decimals in ratios, and multiply to check the result against NI ÷ Equity.
5Compare component by component. Mark each as up, down or flat, and judge which changes are large enough to explain the change in ROE.
6Separate operating drivers (EBIT margin, turnover) from financing drivers (interest burden, leverage). Check whether ROA moved the same way as ROE.
7Bring in liquidity and solvency ratios to test sustainability, and note any accounting or one-off effects mentioned in the vignette.
8Choose the option that matches your analysis. Eliminate options that attribute the change to a component that did not move.

Quickest way: Component comparison shortcut

When to use it: Use it when the question asks which factor drove a change in ROE or why two companies with similar ROE differ.

Skip full recalculation of ROE if the vignette gives it. Compute only the components.
Compute ROA as NI ÷ Assets first. If ROE is higher while ROA is flat or lower, leverage is a likely driver. ROA is after interest, so a lower interest burden can also pull it down.
Compare the equity multiplier next. A large move there usually explains the ROE change.
Check EBIT margin and turnover for the operating story. Their product, EBIT margin × turnover, is the operating return and is not affected by interest.
Check the interest burden last. A falling ratio means interest is taking a larger share of EBIT. This is a financing effect and can lower ROA even when operations improve.
Confirm the answer with one liquidity or coverage ratio before choosing.

Common mistakes in Ratio and DuPont Analysis in Integrated Cases

Treating a higher ROE as automatically better performance.
ROE is shown as a single headline figure and looks like a success measure.
Fix: Check ROA and the equity multiplier. If ROE rose only because leverage rose, the gain comes with more financial risk, not better operations.
Reading the interest burden as interest expense.
The name sounds like a cost, so students think a higher value means higher interest.
Fix: Interest burden is EBT ÷ EBIT. A higher value means less interest cost relative to EBIT. A fall in this ratio is a negative.
Mixing average and year-end balances across components.
Students use whichever figure they see first in the exhibit.
Fix: Use the same basis for every component and every period. If the vignette gives averages, use them for assets and equity.
Attributing the whole ROE change to one component without checking the others.
One ratio changes visibly and the rest are not computed.
Fix: Compute all components. Several can move in opposite directions, and the answer depends on which move is largest.
Ignoring liquidity and solvency when asked about quality or sustainability.
Students treat DuPont as the whole analysis.
Fix: Add the current ratio, the cash conversion cycle and interest coverage. A high ROE with weak coverage or lengthening cash cycles is less sustainable.
Comparing peers without checking their business models.
Ratios are compared as if the same level is good for every company.
Fix: High-margin, low-turnover firms and low-margin, high-turnover firms can have the same ROE. Compare the mix of components, not just the totals.

Worked examples

Example 1

Vignette: Corvina Ltd reports for the current year: Sales 800, EBIT 120, interest expense 20, EBT 100, income tax 25, net income 75. Average total assets are 640 and average equity is 320. The prior year DuPont components were: tax burden 0.75, interest burden 0.90, EBIT margin 14%, asset turnover 1.25, equity multiplier 1.50 (ROE 17.7%). Q1: What is the current-year ROE? A) 11.7% B) 23.4% C) 9.4%. Q2: Which component change best explains the rise in ROE? A) Higher asset turnover B) Lower tax burden C) Higher equity multiplier. Q3: What happened to ROA? A) It rose B) It was unchanged C) It fell slightly.

Show the solution

Q1: Tax burden = 75 ÷ 100 = 0.75. Interest burden = 100 ÷ 120 = 0.8333. EBIT margin = 120 ÷ 800 = 0.15. Asset turnover = 800 ÷ 640 = 1.25. Equity multiplier = 640 ÷ 320 = 2.0.
ROE = 0.75 × 0.8333 × 0.15 × 1.25 × 2.0 = 0.2344. Check: 75 ÷ 320 = 0.2344, or 23.4%.
Q2: Compare with the prior year. Tax burden is unchanged at 0.75 and turnover is unchanged at 1.25. The interest burden fell from 0.90 to 0.8333, a negative. The EBIT margin rose from 14% to 15%, a small positive. The fall in the interest burden outweighed the rise in EBIT margin, so ROA fell. The equity multiplier rose from 1.50 to 2.00, a large positive. Leverage is the main driver.
Q3: Current ROA = 75 ÷ 640 = 11.72%. Prior ROA = 0.75 × 0.90 × 0.14 × 1.25 = 11.81%. ROA fell slightly because the decline in the interest burden (0.90 to 0.833) outweighed the EBIT margin rise. So the ROE gain came from leverage, not from better returns on assets.

Answer: Q1: B (23.4%). Q2: C (higher equity multiplier). Q3: C (ROA fell slightly, from about 11.8% to 11.7%, because the lower interest burden outweighed the higher EBIT margin).

Example 2

Vignette: Analyst compares two retailers. Both report an ROE of 16%. Retailer X has net profit margin 8%, asset turnover 2.0 and equity multiplier 1.0. Retailer Y has net profit margin 4%, asset turnover 1.0 and equity multiplier 4.0. Retailer Y has days of inventory 50, days of receivables 40 and days of payables 30. Q1: Which retailer has the higher ROA? A) X B) Y C) They are equal. Q2: Which statement is best supported? A) Y earns its ROE mainly through leverage B) X earns its ROE mainly through leverage C) Both earn it through margin. Q3: What is Y's cash conversion cycle? A) 20 days B) 60 days C) 120 days.

Show the solution

Q1: ROA = net profit margin × asset turnover. X: 8% × 2.0 = 16%. Y: 4% × 1.0 = 4%. Check ROE: X 16% × 1.0 = 16%; Y 4% × 4.0 = 16%. X has the higher ROA.
Q2: Y has a low margin and low turnover, so its ROA is only 4%. Its equity multiplier of 4.0 lifts ROE to 16%. Y relies on leverage. X has no leverage, so its ROE comes from operations.
Q3: CCC = 50 + 40 − 30 = 60 days.

Answer: Q1: A (X). Q2: A (Y earns its ROE mainly through leverage, which means more financial risk). Q3: B (60 days).

Exam tips

Write the five components in order on your scratch sheet before touching the exhibits, then fill them in for each period.
Check your multiplication against NI ÷ Equity. A mismatch means you used a wrong or inconsistent balance.
When ROE changes, look at ROA and the equity multiplier first. ROA is after interest, so a fall in it can come from the interest burden as well as from operations. Use EBIT margin × turnover to judge operations.
Read the vignette for notes on one-off items, acquisitions or accounting changes. These often explain a margin or turnover shift and decide the best answer.
Wrong options often name a component that did not change. Eliminate them by checking the direction of each ratio.

Ratio and DuPont Analysis in Integrated Cases in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Ratio and DuPont Analysis in Integrated Cases: frequently asked questions

What is the difference between the 3-step and 5-step DuPont?

The 3-step version uses net profit margin, asset turnover and the equity multiplier. The 5-step version splits net profit margin into tax burden, interest burden and EBIT margin. Use the 5-step version to see whether tax, interest or operating profit explains a change.

Does a higher interest burden ratio mean more interest cost?

No. The interest burden is EBT ÷ EBIT, so a higher value means a smaller share of EBIT goes to interest. A falling ratio means interest is taking more of operating profit.

How do I interpret ratios in a FSA case study?

Compute the ratios for each period or peer, compare them, and say what changed and why. Then test whether the result is sustainable using liquidity, coverage and leverage ratios. Choose the option that fits the numbers, not the one that sounds most positive.

Should I use average or year-end balances?

Use averages if the vignette provides them or asks for them, and use one basis consistently. If only year-end figures are given, use those and compare like with like.