Decompose ROE into profit margin, asset turnover, and equity multiplier with 3-factor and 5-factor DuPont models.
DuPont analysis rewrites return on equity as the product of three ratios - profit margin, asset turnover, equity multiplier - so a single number becomes a story about margins, efficiency, and leverage. This calculator takes income statement and balance sheet figures and computes both the classic three-factor decomposition and the extended five-factor version that isolates tax burden and interest burden. The thing most people miss: the decomposition is an algebraic identity, so the factors always multiply back to exactly the ROE you entered, and a high ROE built on the equity multiplier alone is leverage, not performance.
A concrete input and expected output from the current implementation.
Input
Net income $120,000; Revenue $1,200,000; Total assets $600,000; Shareholders' equity $400,000. Five-factor inputs: Operating income (EBIT) $160,000; Pretax income (EBT) $150,000.
Expected output
3-factor: profit margin 10.0% x asset turnover 2.00 x equity multiplier 1.50 = ROE 30.0%. 5-factor: tax burden 0.80 x interest burden 0.9375 x operating margin 13.33% x asset turnover 2.00 x equity multiplier 1.50 = ROE 30.0%.
Both chains cancel to net income divided by equity ($120,000 / $400,000 = 30%), so each decomposition must reproduce 30.0% exactly. The five-factor version splits the 10% margin into a 13.33% operating margin reduced by an interest burden of 0.9375 and a tax burden of 0.80.
ROE equals net income divided by equity, but it also equals profit margin (net income / revenue) times asset turnover (revenue / total assets) times equity multiplier (total assets / equity). The revenue and asset terms cancel, so the product is mathematically identical to ROE. Enter four figures - net income, revenue, total assets, equity - and the tool returns each ratio and their product.
The extended model splits profit margin into three pieces: tax burden (net income / pretax income), interest burden (pretax income / operating income), and operating margin (operating income / revenue), then keeps asset turnover and the equity multiplier. That requires two more inputs - operating income and pretax income - and shows how much of ROE is eroded by interest and taxes versus earned from operations.
Most likely a denominator difference. The tool computes equity as exactly what you enter, while many published ROEs use average equity over the period, beginning-of-period equity, or exclude minority interests. The calculator is an identity - it multiplies the factors back to the exact ROE implied by your inputs - so the mismatch is definitional, not an error. Match the period conventions and the numbers will agree.
Not by itself, but treat it as leverage. The multiplier equals total assets divided by equity, so it rises whenever the company funds more of its assets with debt. It mechanically lifts ROE, yet each extra dollar of leverage adds interest expense and default risk. Pair it with the interest burden from the five-factor model: a company whose multiplier climbs while its interest burden also climbs is compounding risk, not improving performance.
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