# Return on Equity using the Du Pont Model
The DuPont system of financial analysis was created in 1919 by a finance executive at E.I. Du Pont de Nemours and Co. (Wilmington, Delaware). It is still used worldwide and breaks Return on Equity (ROE) into its underlying drivers, so the sources of a company's ROE can be identified and benchmarked against competitors.
## The Three Components
### 1. Profitability — Net Profit Margin
After-tax profit generated per rupee of revenue.
$$\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Sales}}$$
### 2. Asset Turnover
How effectively the company converts assets into sales.
$$\text{Asset Turnover} = \frac{\text{Sales}}{\text{Assets}}$$
### 3. Equity Multiplier
A measure of financial leverage — shows what portion of ROE comes from the use of debt.
$$\text{Equity Multiplier} = \frac{\text{Assets}}{\text{Shareholders' Equity}}$$
## Putting it together
Multiply the three components:
$$\text{ROE} = \frac{\text{Net Income}}{\text{Sales}} \times \frac{\text{Sales}}{\text{Assets}} \times \frac{\text{Assets}}{\text{Shareholders' Equity}}$$
Notice how Sales and Assets cancel out, collapsing back to Net Income ÷ Shareholders' Equity — i.e. ROE. The power of DuPont is not the arithmetic but the diagnosis: it shows whether ROE is driven by margins (profitability), efficiency (turnover), or leverage (debt).
## Extra Knowledge — Ratios disclosed in Notes to Accounts
Companies are now required to disclose these ratios in the notes to accounts:
a. Current Ratio | b. Debt-Equity Ratio | c. Debt Service Coverage Ratio | d. Return on Equity Ratio | e. Inventory Turnover Ratio | f. Trade Receivables Turnover Ratio | g. Trade Payables Turnover Ratio | h. Net Capital Turnover Ratio | i. Net Profit Ratio | j. Return on Capital Employed | k. Return on Investment.