DUPONT FRAMEWORK

The DuPont Framework is a combo-equation that shows some of the strengths and weaknesses of a company and how they affect the return on equity (ROE). 
It breaks down ROE into three key components: 

ROE = (Net Income / Sales) × (Sales / Assets) × (Assets / Equity) 

- Net Income / Sales → Net Profit Margin (Measures profitability) 
- Sales / Assets → Asset Turnover (Measures efficiency) 
- Assets / Equity → Financial Leverage (Measures financial structure) 

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Example: 

Company XYZ has the following financial data: 
- Net Income = $50,000 
- Sales = $200,000 
- Assets = $400,000 
- Equity = $100,000 

Step 1: Calculate Each Component 
- Net Profit Margin =
50,000 / 200,000 = 0.25 (25%) 
- Asset Turnover =
200,000 / 400,000 = 0.5 
- Financial Leverage =
400,000 / 100,000 = 4 

Step 2: Calculate ROE 
ROE = 0.25 × 0.5 × 4 = 0.50 (50%) 

➡️ The Return on Equity (ROE) is 50%. This means that the company generates a 50% return on shareholder investments, driven by profitability, efficiency, and financial leverage. 

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