Decompose return on equity into profit margin, asset turnover, and financial leverage components using the DuPont framework.
This calculator separates return on equity into the three-factor DuPont identity: profit margin, asset turnover, and financial leverage. Enter net income and revenue for one reporting period, plus total assets and shareholders' equity measured on a consistent basis, preferably period averages. The result shows whether profitability, asset use, or leverage contributes most to ROE. A common mistake is mixing annual income figures with unrelated point-in-time balance sheet figures. The factors explain ROE; they are not independent additions to it.
A concrete input and expected output from the current implementation.
Input
Net income = 50 Revenue = 500 Average total assets = 250 Average shareholders' equity = 125
Expected output
Profit margin = 10%; asset turnover = 2; financial leverage = 2; return on equity = 40%.
Profit margin is 50 / 500 = 10%, asset turnover is 500 / 250 = 2, and leverage is 250 / 125 = 2. Their product is 0.10 x 2 x 2 = 0.40, matching 50 / 125 = 40%.
Profit margin is net income divided by revenue. Asset turnover is revenue divided by average total assets. Financial leverage, also called the equity multiplier in this form, is average total assets divided by average shareholders' equity. Because each component is a ratio, the monetary unit cancels, but all inputs should use the same currency and reporting period.
The calculator multiplies the three components to obtain ROE. Revenue cancels between profit margin and asset turnover, while assets cancel between turnover and leverage, leaving net income divided by equity. This reconciliation is useful for checking the inputs. It also shows that the decomposition explains an ROE result rather than creating a different measure of return.
No. A high result can come from a strong profit margin, efficient use of assets, a large equity multiplier, or a combination. The decomposition shows which factor is responsible. A large leverage component may raise ROE while also indicating that a smaller equity base supports the assets, so risk cannot be judged from ROE alone.
Use period averages when possible because net income and revenue cover an interval, while ending assets and equity describe one date. A simple average of beginning and ending balances is common when only two balance sheets are available. If major transactions occurred during the period, that simple average may still be unrepresentative.
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