How to use the dupont roe analysis calculator
- Enter net income, revenue, total assets and shareholders' equity for one period.
- For the five-part view, add pretax income and operating income (EBIT) as well.
- To compare two periods, open the advanced boxes and fill in the earlier period too.
- Read the drivers and, with two periods, the effect each one had on the change in ROE.
Formula
ROE = net income / revenue x revenue / assets x assets / equity
five parts: ROE = (NI / EBT) x (EBT / EBIT) x (EBIT / revenue) x (revenue / assets) x (assets / equity)
effect of a driver = (ROE now - ROE before) / ln(ROE now / ROE before) x ln(driver now / driver before)
The effect formula is a log-mean split. It divides the change in ROE among the drivers so the parts add up to the exact change. It needs every driver above zero in both periods.
Two years of a small company
This year net income is $90,000 on revenue of $1,200,000, with assets of $800,000 and equity of $400,000. That is a margin of 7.5%, an asset turnover of 1.5 and an equity multiplier of 2.0, so ROE is 7.5% x 1.5 x 2.0 = 22.5%.
Last year the figures were $70,000, $1,000,000, $700,000 and $380,000, which gives 7.0%, 1.429 and 1.842, and an ROE of 18.42%. ROE rose 4.08 points: 1.41 from margin, 0.99 from turnover and 1.68 from leverage. The three parts add up to the exact change.
Three questions behind ROE
Return on equity can rise for three different reasons. The business may keep more profit from each dollar of sales, which is margin. It may squeeze more sales from the same assets, which is turnover. Or it may rely more on borrowed money, which is leverage. Splitting ROE shows which of the three is doing the work.
The five-part version separates the tax burden and the interest burden from the operating margin, so you can see whether a gain came from operations or from lower taxes or lower interest cost.
A caution about leverage
A higher equity multiplier lifts ROE and also raises risk, because debt must be repaid whatever profits do. A rise driven only by leverage is not the same as one driven by margin. For related measures, see the Debt to Equity Ratio Calculator and the Profit Margin Calculator.
Assumptions and limits
- Use the same basis for assets and equity in both periods, either year-end balances or averages.
- Equity and assets must be above zero. A negative equity makes ROE hard to interpret.
- The split of the change needs positive drivers in both periods. If one is zero or negative, it is not shown.
- The analysis explains ROE but does not judge whether a level is good.
Frequently asked questions
What is the difference between the three-step and five-step versions?
The three-step version uses margin, turnover and leverage. The five-step version splits the margin into tax burden, interest burden and operating margin, so you can see where profit leaks before it reaches shareholders.
Why must I fill all four earlier boxes?
A comparison needs every driver for the earlier period. Leave all four blank for a single period, or fill all four to compare. Partly filled boxes give an error.
What does the effect on ROE column mean?
It is the number of percentage points of the ROE change that came from that driver. The effects of all drivers add up to the total change in ROE.
Why is ROE from the drivers the same as net income over equity?
The ratios are chained, so each denominator cancels the next numerator. Only net income over equity remains, which is why the two ROE lines match.