Financial Management and Business Data Analytics · Financial Ratio Analysis

DuPont Analysis and Preparing Statements from Ratios

Updated 10 October 2026 · Fact-checked

DuPont analysis splits return on equity into net profit margin, asset turnover and equity multiplier, so you can see what drives ROE. To prepare statements from ratios, start with the given figure, use each ratio to derive one item at a time, and finish by checking that total assets equal capital plus liabilities.

Understand DuPont Analysis and Preparing Statements from Ratios

Return on equity (ROE) tells you how much profit the owners earn on their money. A single ROE figure does not tell you why it is high or low. The DuPont model answers that by splitting ROE into three parts that multiply together.

The three parts are profitability (net profit margin), efficiency (asset turnover) and leverage (equity multiplier). A firm can raise ROE by earning more on each rupee of sales, by using assets harder to produce sales, or by financing more of its assets with borrowed money. The third route raises risk, so a good answer always comments on it.

The model works because the sales and total assets terms cancel when you multiply: (PAT ÷ Sales) × (Sales ÷ Total assets) × (Total assets ÷ Equity) = PAT ÷ Equity. You can extend it to five steps by splitting the margin into tax burden, interest burden and operating margin. The three-step version is the one most asked.

Preparing statements from ratios is a different skill. The question gives you a few figures (often sales or share capital) and a list of ratios, and asks for a balance sheet or income statement. Each ratio links two items. If you know one, the ratio gives you the other. You work through the ratios in a sensible order until every line is filled, then check that the balance sheet balances.

Key rules to remember

Three-step DuPont: ROE = Net profit margin × Asset turnover × Equity multiplier; Same as PAT ÷ Equity. Use the same basis (closing or average) for assets and equity in every part.
Net profit margin: PAT ÷ Sales × 100; Measures profitability. Sales means net sales.
Total asset turnover: Sales ÷ Total assets; Measures efficiency. Answer is in times.
Equity multiplier: Total assets ÷ Shareholders' equity; Equals 1 + (Total outside liabilities ÷ Equity). Higher value means more leverage.
Return on assets (ROA): ROA = PAT ÷ Total assets = Net profit margin × Asset turnover; ROE = ROA × Equity multiplier.
Five-step DuPont: ROE = (PAT ÷ PBT) × (PBT ÷ EBIT) × (EBIT ÷ Sales) × (Sales ÷ Total assets) × (Total assets ÷ Equity); Shows tax burden, interest burden, operating margin, turnover and leverage separately.
Gross profit and cost of goods sold: Gross profit = Sales × GP ratio; Cost of goods sold = Sales − Gross profit; Needed to find inventory and creditors when ratios use cost of goods sold.
Inventory turnover: Cost of goods sold ÷ Inventory; Use the base the question states. If it says sales, use sales.
Debtors collection period: Debtors ÷ Credit sales × Days in year; Use 360 or 365 days as the question says. State your assumption if it is silent.
Current ratio: Current assets ÷ Current liabilities; Gives current assets once current liabilities are known.
Balance sheet check: Total assets = Shareholders' funds + Long-term debt + Current liabilities; Use this to find current liabilities, and to check your finished statement.

How to solve DuPont Analysis and Preparing Statements from Ratios questions

Use this method for both DuPont questions and statement-from-ratio questions. Write every derived figure next to the ratio that gave it.

1Read the question and list every given figure and every ratio. Note the base each ratio uses (sales, cost of goods sold, equity, total assets) and the days in a year.
2For a DuPont question, find PAT, sales, total assets and equity. If one is missing, derive it from a ratio.
3Calculate the three parts: net profit margin, asset turnover and equity multiplier. Multiply them and cross-check with PAT ÷ Equity.
4Interpret. Say which part moved, by how much, and whether the change came from profitability, efficiency or borrowing. Comment on risk if leverage rose.
5For statements from ratios, start from the figure that is given directly, such as sales or share capital. Derive total assets, then funding items such as long-term debt and current liabilities.
6Derive the remaining items in order: current assets, then inventory, then debtors, then cash as the balancing figure. Compute fixed assets as total assets minus current assets.
7Set out the statement in a clean format with all workings shown, so you earn step marks even if one figure is wrong.
8Check that both sides of the balance sheet agree and that any extra ratio you were not forced to use still holds.

Quickest way: Ratio ladder for building a balance sheet

When to use it: Use when a question gives sales or capital plus six to eight ratios and you have limited time.

Draw a blank balance sheet skeleton first, with every line you expect to fill.
Put the given figure in and find total assets from asset turnover, or from capital and debt ratios.
Fill the right-hand side first: equity, long-term debt, then current liabilities as the balancing figure.
Use the current ratio for current assets, and fixed assets is what remains.
Work out inventory and debtors from their ratios. Make cash the last balancing figure.
Tick each ratio once used. A ratio left unticked is a check on your answer.

Common mistakes in DuPont Analysis and Preparing Statements from Ratios

Using debt-equity ratio as the equity multiplier.
Both measure leverage and the names look similar.
Fix: Equity multiplier is Total assets ÷ Equity. If you only have debt ÷ equity, add 1, and only when all of the assets are funded by that debt and equity.
Mixing closing and average figures within one DuPont calculation.
Students use average assets for turnover but closing equity for leverage.
Fix: Choose one basis for the whole calculation. Follow the question if it states one. Otherwise use closing balances and say so.
Calculating inventory from sales when the ratio is based on cost of goods sold.
Students rush and take the sales figure because it is given.
Fix: Read the base of every turnover ratio. If it is cost of goods sold, first work out gross profit and then the cost of goods sold.
Using 365 days when the question implies 360, or the reverse.
Students apply habit instead of reading the problem.
Fix: Use the number of days stated. If none is stated, choose one, write it down, and use it consistently.
Finishing a balance sheet that does not balance, and not checking it.
Cash or fixed assets was forced as a balancing figure early, so an error in an earlier line moves into it.
Fix: Fill the balancing figure last and verify with one ratio you did not use, such as the quick ratio. Recheck current liabilities if it fails.
Stating the ROE figure and stopping there.
Students treat DuPont as arithmetic only.
Fix: Add one or two lines on which component drove the change and whether higher leverage means higher financial risk.

Worked examples

Example 1

A company reports the following. Year 1: Sales ₹8,00,000; PAT ₹48,000; Total assets ₹4,00,000; Shareholders' equity ₹2,00,000. Year 2: Sales ₹9,00,000; PAT ₹45,000; Total assets ₹4,50,000; Shareholders' equity ₹1,50,000. Use the three-step DuPont model to compute ROE for both years and explain the change.

Show the solution

Year 1 net profit margin = 48,000 ÷ 8,00,000 = 6%.
Year 1 asset turnover = 8,00,000 ÷ 4,00,000 = 2 times.
Year 1 equity multiplier = 4,00,000 ÷ 2,00,000 = 2.
Year 1 ROE = 6% × 2 × 2 = 24%. Check: 48,000 ÷ 2,00,000 = 24%.
Year 2 net profit margin = 45,000 ÷ 9,00,000 = 5%.
Year 2 asset turnover = 9,00,000 ÷ 4,50,000 = 2 times.
Year 2 equity multiplier = 4,50,000 ÷ 1,50,000 = 3.
Year 2 ROE = 5% × 2 × 3 = 30%. Check: 45,000 ÷ 1,50,000 = 30%.

Answer: ROE rose from 24% to 30%. Margin fell from 6% to 5% and asset turnover stayed at 2 times, so the whole rise came from the equity multiplier going from 2 to 3. The company is financing more of its assets with outside funds. ROE improved, but financial risk is higher and profitability has weakened.

Example 2

Prepare a balance sheet for Shree Textiles Ltd. from the following. Net sales (all on credit) ₹18,00,000; total asset turnover 1.5 times; shareholders' funds ₹6,00,000; long-term debt to equity 0.5; current ratio 2; gross profit ratio 20%; inventory turnover (on cost of goods sold) 8 times; debtors collection period 40 days (take 360 days a year). Also compute ROE if net profit margin is 5%.

Show the solution

Total assets = Sales ÷ Asset turnover = 18,00,000 ÷ 1.5 = ₹12,00,000.
Long-term debt = 0.5 × 6,00,000 = ₹3,00,000.
Current liabilities = 12,00,000 − 6,00,000 − 3,00,000 = ₹3,00,000.
Current assets = 2 × 3,00,000 = ₹6,00,000.
Fixed assets = 12,00,000 − 6,00,000 = ₹6,00,000.
Gross profit = 20% × 18,00,000 = ₹3,60,000. Cost of goods sold = 18,00,000 − 3,60,000 = ₹14,40,000.
Inventory = 14,40,000 ÷ 8 = ₹1,80,000.
Debtors = 18,00,000 × 40 ÷ 360 = ₹2,00,000.
Cash = 6,00,000 − 1,80,000 − 2,00,000 = ₹2,20,000.
Check with quick ratio: (6,00,000 − 1,80,000) ÷ 3,00,000 = 1.4, which is sensible.
PAT = 5% × 18,00,000 = ₹90,000. ROE = 90,000 ÷ 6,00,000 = 15%. DuPont check: 5% × 1.5 × (12,00,000 ÷ 6,00,000 = 2) = 15%.

Answer: Liabilities side: Shareholders' funds ₹6,00,000; Long-term debt ₹3,00,000; Current liabilities ₹3,00,000; Total ₹12,00,000. Assets side: Fixed assets ₹6,00,000; Inventory ₹1,80,000; Debtors ₹2,00,000; Cash ₹2,20,000; Total ₹12,00,000. ROE = 15%.

Exam tips

Write the DuPont formula first, then substitute. This earns formula marks even if an input is wrong.
In MCQs, check which ROE definition and which base (closing or average) the question uses. Options often differ only in equity multiplier versus debt-equity.
In a statement-from-ratio question, show each derivation as a separate line with the ratio named. Examiners give marks per correct item.
Leave cash or the other balancing item to the end, and use an unused ratio to check it.
Always add a short interpretation line to a DuPont answer. State which component changed and whether leverage affected risk.

Practice questions from Financial Ratio Analysis

DuPont Analysis and Preparing Statements from Ratios in other exams

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

DuPont Analysis and Preparing Statements from Ratios: frequently asked questions

What is the three-step DuPont formula?

ROE = Net profit margin × Asset turnover × Equity multiplier. It equals PAT ÷ Equity because sales and total assets cancel. It shows whether ROE comes from profitability, efficiency or leverage.

How do I calculate ROE using the DuPont model?

Find net profit margin (PAT ÷ Sales), asset turnover (Sales ÷ Total assets) and equity multiplier (Total assets ÷ Equity). Multiply them. Check your answer by dividing PAT by equity.

Should I use average or closing balances in DuPont analysis?

Follow the question. If it gives opening and closing balances and asks for average figures, use averages for all balance sheet items. If it does not say, use closing balances and state that assumption.

Where do I start when preparing a balance sheet from ratios?

Start with the figure that is given directly, usually sales or share capital. Use asset turnover or capital ratios to get total assets, then work through the other ratios one at a time. Fill the balancing figure last.

Can ROE be high even if profit margin is low?

Yes. Strong asset turnover or high leverage can offset a low margin. High ROE from leverage carries higher financial risk, so interpret it with care.