1. What is the Dupont Identity?

The Dupont Identity is a financial analysis framework that breaks down Return on Equity (ROE) into three components: profit margin, asset turnover, and financial leverage. This decomposition helps analysts understand what drives a company's return on equity.

2. How Does the Calculator Work?

The calculator uses the Dupont Identity formula:

Where:

• \( Net \) — Net income ($)
• \( Sales \) — Total sales revenue ($)
• \( Assets \) — Total assets ($)
• \( Equity \) — Shareholders' equity ($)

Explanation: The formula decomposes ROE into three ratios: profit margin (Net/Sales), asset turnover (Sales/Assets), and equity multiplier (Assets/Equity).

3. Importance of ROE Analysis

Details: ROE analysis helps investors understand how effectively a company is using equity financing to generate profits. The Dupont analysis reveals whether high ROE comes from operational efficiency, asset utilization, or financial leverage.

4. Using the Calculator

Tips: Enter all values in dollars. Net income, sales, assets, and equity must be positive values. The calculator will compute ROE as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE value?
A: Generally, ROE above 15% is considered good, but this varies by industry. Compare with industry averages for meaningful analysis.

Q2: How does the Dupont analysis help investors?
A: It helps identify whether a company's ROE is driven by operational efficiency (profit margin), asset utilization (turnover), or financial leverage (equity multiplier).

Q3: Can ROE be too high?
A: Extremely high ROE may indicate excessive financial leverage, which could be risky if not managed properly.

Q4: What are the limitations of Dupont analysis?
A: It uses accounting data which may be subject to manipulation, and doesn't account for risk or the cost of equity.

Q5: How often should ROE be calculated?
A: ROE should be calculated quarterly and annually to track performance trends over time.