Financial Statement Analysis
- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Change in Net Working Capital (NWC) Formula
- Cash Flow from Operations Ratio
- Cash Flow Per Share
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score
- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Days Sales Uncollected
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio
- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Markup Percentage Formula
- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula
DuPont Formula for ROE
Here’s the formula of Return on Equity as per the DuPont Corporation –
DuPont Formula Example
Here’s a simple DuPont formula example to illustrate DuPont ROE formula.
Sutra Co. has the following information –
- Net Income of the year – $50,000
- Revenues of the year – $300,000
- Total Assets of the company – $900,000
- Shareholders’ Equity – $150,000
Using the DuPont ROE formula, we get –
- Return on Equity = Profit Margin * Total Asset Turnover * Leverage Factor
- Or, Dupont ROE = Net Income / Revenues * Revenues / Total Assets * Total Assets / Shareholders’ Equity
- Or, Dupont ROE = $50,000 / $300,000 * $300,000 / $900,000 * $900,000 / $150,000
- Or, Dupont ROE = 1/6 * 1/3 * 6 = 1/3 = 33.33%.
If we directly find out the Return on Equity, we will get –
- Return on Equity = Net Income / Shareholdezrs’ Equity
- Or, ROE = $50,000 / $150,000 = 1/3 = 33.33%.
Dupont ROE for Colgate
In the DuPont formula example below, we calculate the Dupont ROE of Colgate.
4.9 (1,067 ratings)
- Net Income is taken after the minority shareholder’s payment. Therefore, shareholder’s equity consists of only the common shareholder’s of Colgate (not including the minority holders)
- Asset turnover has been declining over the past 7-8 years. In addition, Colgate’s profit margins have also declined over the past 5-6 years
- However, Return on Equity has not shown a declining trend. It is increasing overall.
- This is because of the Equity Multiplier (total assets / total equity). We note that the Equity Multiplier has shown a steady increase over the past 5 years and is currently stands at 30x.
Explanation of DuPont Formula
If we break down this formula, we will be able to make sense of how it works.
- First component of the formula is the net profit margin. If we look at the formula of profit margin, it would be – Net Income / Revenues
- Second component of the formula is total asset turnover. If we look at the formula of total asset turnover, it would be – Revenues / Total Assets
- Third component in the above formula is Equity Multiplier. If we look into the formula of leverage factor, we would get – Total Assets / Shareholders’ Equity.
Now, if we put these three components as DuPont Corporation determined, we will get –
- Return on Equity = Profit Margin * Total Asset Turnover * Leverage Factor
- Or, Return on Equity = Net Income / Revenues * Revenues / Total Assets * Total Assets / Shareholders’ Equity
The magic of this particular formula is, when we multiply these three, ultimately we get – Net Income / Shareholders’ Equity.
However, if we look at each, we would be able to understand total four ratios together.
- First, we will get to know what the profitability of the company is.
- Second, we will be able to understand how efficiently the company has been utilizing its assets.
- Third, how much leverage a company has been getting.
- Fourth, we will also understand the return on equity overall.
In return on equity formula, we are not only including common shares, we are also taking preferred shares, dividends into account.
Shareholders’ equity means we will take the whole statement and the total figure at the end.
Use of DuPont Formula
Every investor needs to be thorough with the financial ratios before ever investing in any company.
- DuPont formula will help them save time and effort. And simultaneously, they would be able to understand how efficiently a company is utilizing its resources and how leveraged the company is.
- ROE definitely throws light on the proportion between net income and the shareholders’ equity; it doesn’t allow us to understand how much profitability a firm has, how the firm has been utilizing its assets etc.
- With DuPont formula, you can calculate all. All you need to do is to look into the income statement, the balance sheet, and the shareholders’ equity statement.
DuPont ROE Calculator
You can use the following DuPont ROE Calculator
|ROE Formula =||Profit Margin x Total Asset Turnover x Leverage Factor|
|0 x 0 x 0 =||0|
DuPont in Excel (with excel template)
Let us now do the same DuPont formula example above in Excel. This is very simple. You need to provide the two inputs of Net Income, Total Assets, Revenues and Shareholders’ Equity.
You can easily calculate the ratio in the template provided.
If we directly find out the ROE, we will get –
This has been a guide to Dupont formula, its uses along with practical DuPont formula example. Here we also provide you with Dupont ROE Calculator with downloadable excel template. Learn more from the following articles on Financial Ratios-