DuPont analysis calculator (three-step and five-step ROE)

Enter a company's income statement and balance sheet figures. It splits return on equity into the parts that drive it, so you can see whether profit, efficiency or leverage is behind it.

How it works

ROE = Net margin × Asset turnover × Leverage

ROE = Tax burden × Interest burden × EBIT margin × Asset turnover × Leverage

Net margin is net income ÷ revenue, asset turnover is revenue ÷ average assets, and leverage is average assets ÷ average equity. The five-step version splits net margin into three pieces.

A worked example

Revenue 1,000, EBIT 130, pre-tax income 100, net income 80, average assets 800 and average equity 400. Net margin is 8%, asset turnover 1.25 and leverage 2.0, so ROE = 8% × 1.25 × 2.0 = 20.0%. The five-step version splits the margin into a tax burden of 0.80, an interest burden of 0.769 and an EBIT margin of 13%, and multiplies to the same ROE.

Common mistakes on the exam

• Use average balances for assets and equity unless the question says otherwise.
• A high ROE from high leverage is a different thing from one earned through margin: leverage raises risk as well as return.
• The five-step identity multiplies out to the three-step ROE, which is a useful check.

The exam allows only certain calculator models, and the rules change: check CFA Institute's current calculator policy before you rely on any keystroke here.

Where this is taught

• Contrast market value with book value and link return on equity to the cost of equity CFA Level I · Equity Investments
• Break return on equity into its parts with DuPont analysis CFA Level I · Financial Statement Analysis
• Work out a firm's sustainable growth rate and explain it, showing how DuPont analysis can be used to estimate that rate CFA Level II · Equities
• Back out the growth rate implied in residual income from the market P/B ratio and an estimated required return on equity CFA Level II · Equities

Read the guide

• DuPont analysis explained: what is behind a return on equity

Practise what you read

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

Questions people ask