# DuPont Decomposition of Return on Equity (ROE)
The traditional DuPont model breaks ROE into three components, allowing analysts to identify the source of returns and compare firms with their competitors.
$$\boxed{ROE = \text{Net Profit Margin} \times \text{Asset Turnover} \times \text{Equity Multiplier}}$$
## Component 1: Net Profit Margin
After-tax profit generated per rupee of revenue.
$$\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Revenue}}$$
- Acts as a safety cushion.
- The lower the margin, the lesser the room for error.
## Component 2: Asset Turnover
How effectively the company converts assets into sales.
$$\text{Asset Turnover} = \frac{\text{Revenue}}{\text{Assets}}$$
- Inversely related to Net Profit Margin — high-margin businesses (luxury) tend to have low turnover; low-margin businesses (retail) tend to have high turnover.
## Component 3: Equity Multiplier
Measure of financial leverage — shows how much of ROE is the result of using debt.
$$\text{Equity Multiplier} = \frac{\text{Assets}}{\text{Shareholders' Equity}}$$
> ⚠️ A company with poor margins and sales can artificially boost ROE by piling on debt. The Equity Multiplier exposes this risk.
## Why DuPont Matters
By examining each driver, the analyst sees WHY a company earns its ROE — operating efficiency, asset utilization, or leverage — and can compare it meaningfully across competitors.