Du Pont Analysis

Categories: Stocks, Strategies,

A type of analysis that examines a company's return on equity (ROE) by breaking it into three main components: profit margin, asset turnover and leverage factor. By breaking the ROE into distinct parts, investors can examine how effectively a company is using equity, since poorly performing components will drag down the overall figure. To calculate a firm's ROE through Du Pont analysis, multiply the profit margin (net income divided by sales), asset turnover (sales divided by assets) and leverage factor (total assets divided by shareholders' equity) together. The higher the result, the higher the return on equity.