DuPont Formula

Formula to Calculate Dupont ROE

Dupont Formula, derived by the Dupont Corporation in 1920, calculates Return on Equity (ROE) by dividing it into 3 parts – Profit Margins, Total Asset Turnover, and the Leverage Factor and is effectively used by investors and financial analyst to identify how a company is generating its return on shareholders equity.

Here’s the formula of Return on Equity as per the DuPont Corporation –

Return on Equity (ROE) = Profit Margin * Total Asset Turnover * Leverage Factor
DuPont-Formula-for-ROE

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: DuPont Formula (wallstreetmojo.com)

DuPont Formula Example

Here’s a simple example to illustrate DuPont ROE formula.

You can download this DuPont Excel Template here – DuPont Excel Template

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 / Shareholders’ 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.

Dupont ROE 1
  • 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.

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 the 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 the return on equity formula, we not only include common shares, but take taking preferred shares and dividends into account.

Shareholders’ equity means we will take the the total figure at the end.

Use of DuPont Formula

Every investor needs to be thorough with the financial ratiosFinancial RatiosFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more before ever investing in any company.

DuPont ROE Calculator

You can use the following DuPont ROE Calculator

Profit Margin
Total Asset Turnover
Leverage Factor
ROE Formula
 

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.

DuPont Formula in Excel

If we directly find out the ROE, we will get –

Example

DuPont Formula Video

Recommended Articles

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 a downloadable excel template. Learn more from the following articles on Financial Ratios-