Simplified Du Pont Analysis

Breaks down Return on Equity (ROE) into key components to identify performance drivers

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➡️ Step-by-Step Flow:

1. Revenues 
• Comes from core business activities

2. Total Costs 
• Includes: 
 - Cost of Product 
 - Cost of Sales 
 - Admin Cost

3. Net Profit = Revenues - Total Costs

4. Profit Rate = Net Profit ÷ Revenues 
→ Indicates profitability per dollar earned

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5. Assets 
• Current Assets: 
 - Cash 
 - Receivable 
 - Inventory 
 - Securities 
 - Other 

• Fixed Assets: 
 - Land 
 - Buildings 
 - Equipment 

Total Asset = Current Asset + Fixed Asset

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6. Asset Turnover = Revenues ÷ Assets 
→ Measures efficiency of asset use to generate sales

7. Equity Multiplier = Assets ÷ Equity 
→ Indicates financial leverage

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🔁 Final Formula: Du Pont ROE
ROE = Profit Rate × Asset Turnover × Equity Multiplier


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✅ Interpretation Guide:
• High Profit Rate → Strong cost control or premium pricing 
• High Asset Turnover → Efficient operations and use of machinery/space 
• High Equity Multiplier → Higher leverage, risk/reward trade-off

Cable Factory Example: 
- Profit Rate: Boost by reducing scrap rates 
- Asset Turnover: Improve by optimizing line speed 
- Equity Multiplier: Adjust via financing decisions

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Tip: Use Du Pont to diagnose whether ROE is driven by operations, efficiency, or financial leverage.