← Business Metric: Financial (all topics)
ROE & DuPont decomposition
What it is
Return on equity is net profit divided by shareholders' funds. DuPont splits it into three drivers - net margin, asset turnover and financial leverage - so a single number becomes a diagnosis
If return on assets is flat while return on equity rises, the company is adding debt rather than improving operations
Impact on industries
- The decomposition shows why a return is high or low, separating pricing power from asset efficiency from balance-sheet gearing
- It makes two superficially similar companies comparable, revealing whether returns come from operations or from leverage
- Leverage inflates the headline, so a high return on equity can signal balance-sheet risk rather than business quality
- Sector context is essential - banks run high leverage by construction, so their equity returns are not comparable to a manufacturer's