DuPont Analysis

Overview

DuPont decomposes ROE into three multiplicative components: Net Profit Margin × Asset Turnover × Equity Multiplier. This reveals whether ROE is driven by profitability, efficiency, or leverage — critical for diagnosis and comparison.

When to Use

Trigger conditions:

• User asks "why is our ROE high/low?"
• User comparing financial performance across companies
• User needs to identify which operational lever improves returns
• User analyzing profitability beyond top-line metrics

When NOT to use:

• For company valuation → use DCF
• For comprehensive ratio analysis → use Financial Ratios skill
• For strategic positioning → use SWOT

Framework

IRON LAW: Three-Factor Decomposition

ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
    = (Net Income/Revenue) × (Revenue/Total Assets) × (Total Assets/Equity)

All three factors MUST be calculated and analyzed. Reporting ROE without
decomposition is like reporting a fever without checking symptoms.

IRON LAW: High Leverage ≠ Good Performance

A high Equity Multiplier (Assets/Equity) inflates ROE through debt.
A company with 5% margin, 1.0x turnover, and 6x leverage has ROE of 30% —
but is one bad quarter away from insolvency. Always flag when leverage
is the dominant driver.

Step 1: Calculate the Three Components

Component	Formula	What It Measures
Net Profit Margin	Net Income / Revenue	Profitability — how much of each dollar of revenue becomes profit
Asset Turnover	Revenue / Total Assets	Efficiency — how well assets generate revenue
Equity Multiplier	Total Assets / Shareholders' Equity	Leverage — how much debt amplifies equity returns

Step 2: Diagnose the Driver

Compare each component to industry benchmarks and trends:

• Margin-driven ROE: Premium brands, tech companies (high margin, lower turnover)
• Turnover-driven ROE: Retail, fast food (low margin, high turnover)
• Leverage-driven ROE: Banks, real estate (moderate margin, high leverage) — flag the risk

Step 3: Trend Analysis

Calculate DuPont components for 3-5 years. Identify:

• Which component is improving/declining?
• Is improving ROE driven by operations (margin, turnover) or financial engineering (leverage)?

Step 4: Peer Comparison

Compare DuPont components across competitors to identify relative strengths/weaknesses.

Output Format

⚠️ Decimal vs percent: The bundled script returns ROE and all margin/burden components as decimals (0.2014 means 20.14%, NOT 20.14). The narrative table below renders them as percentages for humans, but JSON outputs and any downstream pipeline must use decimals consistently.

# DuPont Analysis: {Company}

## ROE Decomposition

| Component | Value | Industry Avg | Trend (3yr) |
|-----------|-------|-------------|-------------|
| Net Profit Margin | X% | X% | ↑/↓/→ |
| Asset Turnover | X.Xx | X.Xx | ↑/↓/→ |
| Equity Multiplier | X.Xx | X.Xx | ↑/↓/→ |
| **ROE** | **X%** | **X%** | ↑/↓/→ |

## Diagnosis
- Primary ROE driver: {margin / turnover / leverage}
- Risk flag: {leverage concern if applicable}

## Peer Comparison
| Company | Margin | Turnover | Leverage | ROE |
|---------|--------|----------|----------|-----|
| {Company} | X% | X.Xx | X.Xx | X% |
| {Peer A} | ... | ... | ... | ... |

## Recommendations
1. {Which lever to improve and how}

Examples

Correct Application

Scenario: DuPont for two Taiwanese retailers

	Company A	Company B
Net Profit Margin	2%	8%
Asset Turnover	3.5x	1.2x
Equity Multiplier	2.0x	2.0x
ROE	14%	19.2%

Diagnosis: Company A is turnover-driven (high-volume, low-margin retail). Company B is margin-driven (premium positioning). Both have similar leverage — ROE difference comes from operations ✓

Incorrect Application

• ROE is 25% and reported as "excellent" without decomposition. Turns out: Margin 3%, Turnover 1.0x, Leverage 8.3x → Almost entirely leverage-driven, extremely risky. Violates Iron Law: must decompose.

Gotchas

• Extended 5-factor DuPont: For deeper analysis, decompose margin into Tax Burden × Interest Burden × Operating Margin. Useful when comparing across tax jurisdictions.
• Negative equity breaks the model: Companies with accumulated losses can have negative equity, making the multiplier meaningless. Note and use alternative metrics.
• One-time items distort margin: Use normalized/adjusted net income to avoid single-year spikes from asset sales, write-downs, or legal settlements.
• Turnover varies wildly by industry: Asset-light businesses (SaaS) have naturally high turnover. Capital-heavy businesses (manufacturing) have low turnover. Compare within industry only.

Scripts

Script	Description	Usage
scripts/dupont.py	Decompose ROE into 3-factor or 5-factor DuPont components	python scripts/dupont.py --help

Run python scripts/dupont.py --verify to execute built-in sanity tests.

References

• For 5-factor DuPont extension, see references/extended-dupont.md