# Du Pont Analysis
Du Pont analysis decomposes a return ratio into its drivers, so we can see why the return is high or low. It is a powerful diagnostic for management.
## Du Pont Model 1: Decomposing ROI
$$\text{ROI} = \text{Net Operating Profit Ratio} \times \text{Capital Turnover Ratio}$$
$$\frac{\text{Profit}}{\text{Capital Employed}} = \frac{\text{Profit}}{\text{Sales}} \times \frac{\text{Sales}}{\text{Capital Employed}}$$
Return = Margin × Turnover.
- A firm can lift ROI by increasing margin per sale OR by spinning the same capital more times.
- A retail discount store typically runs on low margin × high turnover. A luxury brand runs on high margin × low turnover.
## Du Pont Model 2: Three-Factor Decomposition of ROE
$$\text{ROE} = \text{Net Profit Margin} \times \text{Asset Turnover} \times \text{Equity Multiplier}$$
Where:
- Net Profit Margin = Net Income / Revenue
- Asset Turnover = Revenue / Total Assets
- Equity Multiplier = Total Assets / Shareholders' Equity
The three drivers represent:
1. Operating Efficiency (margin)
2. Asset Use Efficiency (turnover)
3. Financial Leverage (equity multiplier)
A high ROE could result from high margin, high efficiency, OR high leverage — Du Pont tells you which.
## Why It Matters
Two firms can have the same ROE but very different risk profiles. The Du Pont decomposition lets investors and managers see whether returns come from real operating strength or from financial engineering (leverage).