Formula to Calculate Dupont ROE

Here’s the formula of Return on Equity as per the DuPont Corporation –

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DuPont Formula Example

Here’s a simple example to illustrate DuPont ROE formula.

Key Takeaways

  • The DuPont formula created by the DuPont corporation tries to calculate the return on equity using three different instruments: profit margins, total asset turnover, and leverage factors. It means that the investor can understand the company’s performance based on its returns on shareholders’ equity. The DuPont formula’s return on equity is calculated by multiplying the three factors of profit margins, total asset turnover, and leverage factors. On multiplying the three factors, the outcome, thus arrived, is the shareholders’ equity or the net income. This formula helps investors understand the firm’s profitability, how effectively it allocates resources, and how established it is.

  • Net Income of the year – $50,000Revenues of the year – $300,000Total Assets of the company – $900,000Shareholders’ Equity – $150,000

Using the DuPont ROE formula, we get –

  • Return on Equity = Profit Margin * Total Asset Turnover * Leverage FactorOr, Dupont ROE = Net Income / Revenues * Revenues / Total Assets * Total Assets / Shareholders’ EquityOr, Dupont ROE = $50,000 / $300,000 * $300,000 / $900,000 * $900,000 / $150,000Or, Dupont ROE = 1/6 * 1/3 * 6 = 1/3 = 33.33%.

If we directly find out the Return on Equity, we will get –

  • Return on Equity = Net Income / Shareholders’ EquityOr, ROE = $50,000 / $150,000 = 1/3 = 33.33%.

Dupont ROE for Colgate

In the DuPont formula example below, we calculate the Dupont ROE of Colgate.

  • Net income is taken after the minority shareholder’s payment. Therefore, shareholder’s equity consists of only the common shareholders of Colgate (not including the minority holders).Asset turnover has been declining over the past 7-8 years. In addition, Colgate’s profit margins have also declined over the past 5-6 years.However, Return on Equity has not shown a declining trend. It is increasing overall.This is because of the Equity MultiplierEquity MultiplierThe equity multiplier is a simple ratio of total assets to total equity that helps us understand how much of the company’s assets are financed by shareholder equity. If this ratio is higher, the financial leverage (total debt to equity) is higher and vice versa.read more (total assets / total equity). We note that the Equity Multiplier has shown a steady increase over the past five years and stands at 30x.

Explanation of DuPont Formula

If we break down this formula, we will be able to make sense of how it works.

  • The first component of the formula is the net profit marginNet Profit MarginNet profit margin is the percentage of net income a company derives from its net sales. It indicates the organization’s overall profitability after incurring its interest and tax expenses.read more. If we look at the profit margin, it would be – Net Income / Revenues.The second component of the formula is total asset turnover. If we look at the formula of total asset turnover, it would be – Revenues / Total Assets.The third component in the above formula is Equity Multiplier. If we look into the formula of leverage factor, we will get – Total Assets / Shareholders’ Equity.

Now, if we put these three components as DuPont Corporation determined, we will get –

  • Return on Equity  = Profit Margin * Total Asset Turnover * Leverage FactorOr, Return on Equity = Net Income / Revenues * Revenues / Total Assets * Total Assets / Shareholders’ Equity

The magic of this particular formula is, when we multiply these three, ultimately, we get – Net Income / Shareholders’ Equity.

However, if we look at each, we would be able to understand the total four ratios together.

  • First, we will get to know what the profitability of the company is.Second, we will be able to understand how efficiently the company has been utilizing its assets.Third, how much leverage a company has been getting.Fourth, we will also understand the return on equity overall.

In the return on equity formula, we not only include common shares, but take taking preferred shares and dividends into account.

Shareholders’ equityShareholders’ EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period.read more means we will take the total figure at the end.

Use of DuPont Formula

Every investor needs to be thorough with the financial ratiosFinancial RatiosFinancial ratios are indications of a company’s financial performance. There are several forms of financial ratios that indicate the company’s results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more before ever investing in any company.

  • It helps investors save time and effort. And simultaneously, they would understand how efficiently a company is utilizing its resources and how leveraged the company is.ROE throws light on the proportion between net income and the shareholders’ equity; it doesn’t allow us to understand how much profitability a firmProfitability A FirmProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance.read more has, how the firm has been utilizing its assets etc.With this formula, you can calculate all. All you need to do is look into the income statement, the balance sheet, and the shareholders’ equity statement.

DuPont ROE Calculator

You can use the following DuPont ROE Calculator

DuPont in Excel (with excel template)

Let us now do the same DuPont formula example above in Excel. This is very simple. You need to provide the two inputs of Net Income, Total Assets, Revenues, and Shareholders’ Equity.

You can easily calculate the ratio in the template provided.

If we directly find out the ROE, we will get –

DuPont Formula Video

This has guided the Dupont formula, its uses, and practical DuPont formula examples. We also provide you with Dupont ROE Calculator with a downloadable excel template. Learn more from the following articles on Financial Ratios-

DuPont is a verified framework created by the DuPont corporation to calculate the return on shareholders’ equity by firms. It tries to compare the operating performance of companies in similar industries.

The DuPont chart is a graphical representation that helps the company and its management understand the company’s profit structure, the faulty areas that need improvement, and the areas that need further analysis.

A shareholders’ return on equity of 10% means that on every $100 equity owned by the company, a profit of $10 is generated for the shareholders. So, it tells the investor the profit generated on the company’s equity.

A range of 33%-55% is considered good enough from an investor’s point of view for them to feel satisfied with the stock. Any company able to give out around half of its earnings at dividends means it is a well-established leader in its industry.

One can calculate the figure by the following formula – Total dividend (by business) + Interim dividends / Outstanding ordinary shares number

Apple once broke the record for the highest dividend under the S&P 500 group. Just Apple’s dividend alone can increase the payment by S&P 500 by upto 3.9%.

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