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Dupont Equation

The DuPont analysis allows for expanding the ROE and ROA equations to shed light on what parts of the enterprise contribute. One of the advantages of the model is that it uses information from both the Balance Sheet and the Income Statement. It was developed by Donaldson Brown while working at DuPont.

ROA equation

Multiplying by Sales / Sales we can expand ROA to the Basic DuPont Equation.

(2a) ROA = Profit Margin • Total Asset Turnover

If a business is financed only with common stock, then ROA and ROE would be the same. Most publicly held companies finance with a combination of equity and debt, and because equity will be smaller than total assets we transform the basic DuPont equation by introducing the equity multiplier: total attests / common equity.

Dupont Equation 1

Dupont Equation 2

(2a) ROE = Profit Margin • Total Asset Turnover • Equity Multiplier

Dupont Equation 3

Dupont Equation 4

(4a) ROE= [Operating Profit Margin • Asset Turnover – Interest Expense Rate] • Equity Multiplier • Tax Retention Rate