DuPont decomposition
Principles of Finance glossary · Financial Statements, Markets & Working Capital
Definition
Breaking ROE into profit margin, asset turnover, and equity multiplier (or further into tax burden, interest burden, operating margin, asset turnover, and equity multiplier).
DuPont decomposition in plain English
DuPont decomposition is a way of taking one big summary number — Return on Equity, or ROE, which measures how much profit a company earns for every dollar its owners put in — and cracking it open to see WHERE that performance actually comes from. It splits ROE into pieces like profit margin (how much of each sale becomes profit), asset turnover (how efficiently the company uses its stuff to generate sales), and the equity multiplier (how much borrowed money, or leverage, is amplifying the result). It's like a coach reviewing not just the final score but the separate stats — shooting, passing, defense — to learn why a team won. Two companies can have the same ROE for totally different reasons, and this breakdown reveals whether the strength is real efficiency or just a lot of debt.
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