NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis

DuPont Analysis: Formula and ROE Breakdown

Updated 11 October 2026 · Fact-checked

DuPont analysis splits return on equity (ROE) into parts to show what drives it. The three-step form is ROE = net profit margin × asset turnover × equity multiplier. Compute each ratio, multiply them, and check that the product equals net profit ÷ shareholders' equity.

Understand DuPont Analysis

Return on equity tells you how much profit a company earns on the money shareholders have put in. But a single ROE figure does not tell you why it is high or low. DuPont analysis answers that question.

ROE can be high for three different reasons. The company may earn a good profit on each rupee of sales (net profit margin). It may use its assets well to generate sales (asset turnover). Or it may use a lot of borrowing (financial leverage, measured by the equity multiplier). DuPont analysis separates these three drivers.

Why does this matter? Two companies can both show an ROE of 20%. One may get it from strong margins and good operations. The other may get it from heavy debt, which adds risk. An analyst who sees only ROE cannot tell them apart.

The five-step DuPont goes one level deeper. It splits net margin into tax burden and interest burden and operating margin. So the drivers become tax, interest cost, operating profitability, asset use and leverage. Use it when you need to see whether a change in ROE comes from operations, financing or tax.

You can compare a company with its past years or with peers. A fall in ROE can then be traced to the exact ratio that moved.

Key formulas to remember

ROE: ROE = Net profit ÷ Average (or closing) shareholders' equity; Use the same equity basis (closing or average) in every ratio of the question.
Three-step DuPont: ROE = (Net profit ÷ Sales) × (Sales ÷ Total assets) × (Total assets ÷ Shareholders' equity); Net profit margin × asset turnover × equity multiplier. Total assets cancel out and sales cancel out.
Equity multiplier: Equity multiplier = Total assets ÷ Shareholders' equity; Higher value means more assets financed by debt. It is always 1 or more when equity is positive and assets are at least equal to equity.
Five-step DuPont: ROE = (Net profit ÷ PBT) × (PBT ÷ EBIT) × (EBIT ÷ Sales) × (Sales ÷ Total assets) × (Total assets ÷ Equity); Tax burden × interest burden × EBIT margin × asset turnover × equity multiplier. PBT is profit before tax.
ROA link: ROA = Net profit margin × Asset turnover; ROE = ROA × Equity multiplier; Use this to find a missing figure quickly.

How to solve DuPont Analysis questions

Use this method for any DuPont question, whether it asks for ROE, one missing ratio, or the reason for a change.

1Read which version is asked: three-step or five-step.
2List the given figures: net profit, sales, total assets, equity, and for five-step also PBT and EBIT.
3Calculate each ratio separately: net margin, asset turnover, equity multiplier (and tax burden, interest burden, EBIT margin if five-step).
4Multiply the ratios to get ROE. Check it against net profit ÷ equity if both are given.
5If a missing figure is asked, rearrange: for example equity multiplier = ROE ÷ (margin × turnover).
6If the question compares two periods or companies, find which ratio changed most and name it as the driver.
7Convert to a percentage only at the end, and match the option format.

Quickest way: Multiply and cross-check

When to use it: Use when the options are close in value and you have limited time.

Write the three ratios as decimals, not percentages.
Multiply margin by turnover first to get ROA.
Multiply ROA by the equity multiplier to get ROE.
If the question gives net profit and equity, do a one-line check: net profit ÷ equity.
For 'which factor drove the change' questions, skip full calculation and compare each ratio across the two periods.

Common mistakes in DuPont Analysis

Using equity ÷ assets instead of assets ÷ equity for the equity multiplier.
Students confuse it with the equity ratio or debt ratios.
Fix: Remember the multiplier is assets over equity, so it multiplies equity up to assets. It is 1 or more in normal cases.
Mixing closing and average equity or assets within one calculation.
Different figures are given and students pick whichever is handy.
Fix: Use one basis throughout, as the question states. If none is stated, use the figures given.
Treating a high ROE as always good.
Students look at the result and ignore the drivers.
Fix: Check whether leverage is the main driver. High ROE from high debt means higher financial risk.
Using EBIT or PBT instead of net profit in the three-step version.
Several profit figures appear in the data.
Fix: In the three-step form the margin is net profit ÷ sales. Use EBIT and PBT only in the five-step form.
Mixing up tax burden and interest burden in the five-step form.
Both are ratios close to 1 and look similar.
Fix: Tax burden = net profit ÷ PBT. Interest burden = PBT ÷ EBIT.
Entering percentages as whole numbers while multiplying decimals.
A margin of 10% is typed as 10 in one step and 0.10 in another.
Fix: Convert every ratio to a decimal before multiplying and convert the answer back at the end.

Worked examples

Example 1

A company has net profit of ₹60 crore, sales of ₹600 crore, total assets of ₹400 crore and shareholders' equity of ₹200 crore. Using three-step DuPont analysis, find its ROE.

Show the solution

Net profit margin = 60 ÷ 600 = 0.10, or 10%.
Asset turnover = 600 ÷ 400 = 1.5 times.
Equity multiplier = 400 ÷ 200 = 2.
ROE = 0.10 × 1.5 × 2 = 0.30.
Check: 60 ÷ 200 = 0.30. It matches.

Answer: ROE = 30%

Example 2

A company has sales of ₹800 crore, EBIT of ₹120 crore, PBT of ₹100 crore, net profit of ₹70 crore, total assets of ₹500 crore and equity of ₹250 crore. Find its ROE using five-step DuPont analysis.

Show the solution

Tax burden = 70 ÷ 100 = 0.70.
Interest burden = 100 ÷ 120 = 0.8333.
EBIT margin = 120 ÷ 800 = 0.15.
Asset turnover = 800 ÷ 500 = 1.6.
Equity multiplier = 500 ÷ 250 = 2.
ROE = 0.70 × 0.8333 × 0.15 × 1.6 × 2 = 0.28.
Check: 70 ÷ 250 = 0.28. It matches.

Answer: ROE = 28%

Exam tips

Expect numerical questions giving sales, assets, equity and profit. Know the three-step formula cold.
For conceptual options, remember the three drivers: profitability (margin), efficiency (turnover) and leverage (equity multiplier).
If a question says ROE rose but margin and turnover were unchanged, the answer is higher leverage.
Negative marking applies, so do the one-line cross-check of net profit ÷ equity before choosing an option.
In five-step questions, label each ratio on paper to avoid swapping tax and interest burden.

Practice questions from Company Analysis - Financial Analysis

DuPont Analysis 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: frequently asked questions

What is the DuPont analysis formula for three steps?

ROE = net profit margin × asset turnover × equity multiplier. That is (net profit ÷ sales) × (sales ÷ total assets) × (total assets ÷ equity). The result equals net profit ÷ equity.

How is five-step DuPont different from three-step?

Five-step splits net profit margin into three parts: tax burden, interest burden and EBIT margin. Asset turnover and equity multiplier stay the same. It shows whether ROE changes come from operations, financing cost or tax.

What does a high equity multiplier mean?

It means a larger share of assets is financed by debt rather than equity. This can raise ROE, but it also raises financial risk. Analysts check it before calling a high ROE good.

Why do analysts use DuPont analysis instead of just ROE?

ROE alone does not show why returns are high or low. DuPont analysis shows if the cause is margin, asset efficiency or leverage. This helps compare companies and track changes over time.