What is DuPont analysis?
A decomposition of return on equity (ROE) into three drivers: net profit margin, asset turnover, and equity multiplier. Developed by DuPont Corporation in the 1920s. Remains the cleanest framework for understanding WHY a company's ROE is high or low.
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier. Net profit margin (net income / revenue) captures profitability per dollar of sales. Asset turnover (revenue / assets) captures asset efficiency. Equity multiplier (assets / equity) captures leverage. The decomposition reveals whether high ROE comes from genuine operating excellence (high margin and turnover) or from financial leverage (high multiplier). A 20% ROE from 4% margin × 1.0x turnover × 5x leverage is fragile; a 20% ROE from 10% margin × 2.0x turnover × 1.0x leverage is durable.
Why the decomposition matters
Two companies with identical 15% ROE can be structurally different businesses. Apple's ROE comes from high margins (operational excellence). A bank's ROE comes from leverage (the equity multiplier dominates). These are not equivalent positions. DuPont reveals the underlying composition.
The 5-step DuPont expansion further decomposes net profit margin into operating margin and interest + tax effects. For invest-like, the 3-step decomposition is sufficient.
How invest-like uses it
The DuPont decomposition is surfaced as context on every per-stock verdict page. The Buffett-Fit financial-health pillar penalises companies whose ROE comes primarily from leverage (high equity multiplier) rather than operational excellence (high margin and turnover).
Frequently asked questions
What is DuPont analysis?
A decomposition of ROE into net profit margin, asset turnover, and equity multiplier. Identifies whether high ROE comes from operating excellence or financial leverage.
Why is the decomposition useful?
Because two companies with identical ROE can have structurally different businesses, one driven by operational excellence, one by leverage. DuPont reveals which.
How does invest-like use it?
DuPont is context on every verdict page. The Buffett-Fit financial-health pillar penalises leverage-driven ROE relative to operationally-driven ROE.
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