ROE / DuPont breakdown
Break a return on equity into its three parts, so you can tell a genuinely excellent business from one that simply borrowed a lot.
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How to use this calculator
Each step names a control you will find on screen above.
- Net profit margin
Profit as a percentage of sales. High margins usually mean pricing power — a brand, a patent, a network people cannot leave.
- Asset turnover
Revenue divided by assets: how hard the asset base works. A supermarket has thin margins and enormous turnover; a luxury brand is the reverse.
- Equity multiplier
Assets divided by equity — the leverage term. A multiplier of 1 means no debt at all; 3 means two-thirds of the assets are funded by somebody else.
- Watch which term is doing the work
Multiply the three and you have ROE. The judgement is entirely about which one produced it.
Worked example: Two companies, the same 30% ROE
Both report a 30% return on equity. One earns it from the business; the other borrows its way there.
What to enter
- Company A — Net margin
- 10%
- Company A — Asset turnover
- 1.5×
- Company A — Equity multiplier
- 2.0×
- Company B — Net margin
- 5%
- Company B — Asset turnover
- 1.5×
- Company B — Equity multiplier
- 4.0×
What it shows you
- Company A ROE
- 30%
- Company B ROE
- 30%
- A without leverage
- 15%
- B without leverage
- 7.5%
10 × 1.5 × 2.0
5 × 1.5 × 4.0
still a good business
an ordinary one
Where this is taught
A calculator gives you a number. These explain what the number means and when it misleads you.
- Fundamental Analysis12 minCapital allocation: what management does with the cashThe single most consequential thing a CEO does, the five options available, and how to judge whether they chose well.
- Fundamental Analysis11 minProfitability and return ratiosROE, ROCE and the DuPont breakdown — how to tell whether a company earns its returns through skill or through leverage.
- Fundamental Analysis11 minGoodwill and intangiblesAssets you cannot touch, valued by judgement. What each represents, why goodwill is a record of a decision rather than a thing, and when to ignore it.
- Fundamental Analysis12 minReading a company that is buildingCapital expenditure makes the numbers look worse before it makes them better. Knowing where a company sits in that cycle explains a lot of otherwise confusing results.
- Fundamental Analysis12 minReturn on incremental capitalHistoric ROCE tells you what a business earned in the past. The return on each new rupee invested tells you what compounding is still available.