DuPont analysis: three ways to earn the same return
Two companies can earn a 24% return on equity in completely different ways: by keeping a lot of each sale, by selling a lot against each rupee of assets, or by funding the assets with borrowed money. DuPont analysis splits the return into those three parts. This lesson lets you build the same return three ways, then splits Titan's and Info Edge's.
- Level
- Beginner
- Reading time
- About 25 minutes
- Know this first
- Debt and coverage ratios
By the end you will be able to:
- split return on equity into margin, asset turnover and the equity multiplier
- explain what each part says about how a business earns its return
- say which part moved when a company's return on equity changed
- name the limits of the split and where the five-step version goes further
One return, three routes
Return on equity is profit after tax divided by the owners' equity. The previous lesson showed that the number moves when profit moves, when borrowing changes, and when the balance sheet changes in other ways. It does not say which. DuPont analysis answers that by splitting the return into three parts that multiply together. The method is named after the chemical company where it was developed in the early twentieth century.
Each part is a different kind of strength. The margin is how much of each rupee of sales the business keeps. The asset turnover is how many rupees of sales it makes for each rupee of assets, which says how hard the assets are worked. The equity multiplier is how many rupees of assets the business has for each rupee of the owners' money, which says how much is borrowed. Margin times turnover is the return on assets. The multiplier turns that into the return on equity.
Build the same return three ways
Set the three parts and read the two returns. The starting values give a 24.0% return on equity: an 8% margin, assets turned 1.50 times, and ₹2.0 of assets for each ₹1 of equity.
A margin of 8.0% on sales turned 1.50 times a year gives a return on assets of 12.0%. Funding the assets with 2.0 rupees of assets for each rupee of equity lifts that to a return on equity of 24.0%.
Try three experiments. First, reach the same 24.0% by a different route: margin 2%, turnover 3.00 times, multiplier 4.0. The business keeps only 2 paise of each rupee of sales, yet earns the same return on equity, because it turns its assets three times a year and the owners supply a quarter of them. This is the pattern of a high-volume, low-margin business, funded largely by creditors. Second, set the margin to 30%, turnover to 0.20 and multiplier to 1.0. Return on equity is 6.0%, and a business that keeps almost a third of every sale earns a smaller return than the first, because it needs five rupees of assets to make one rupee of sales. Third, go back to the starting values and raise only the multiplier to 4.0. The return on assets stays at 12.0% while return on equity doubles to 48.0%. Nothing about the business improved. The owners just put in less of the money.
What each part tells you
Margin: how much is kept
This is the net margin of the profitability lesson, so it carries everything above it: pricing, costs, interest, tax and one-off items. A change here usually has an explanation in the income statement.
Asset turnover: how hard the assets work
Revenue divided by total assets. A shop that sells its stock quickly and owns little else turns its assets many times. A business with large buildings or a big investment portfolio turns them slowly. The cash cycle and the days of stock, receivables and payables in the lesson on working capital are the same idea applied to individual assets. Assets that do not produce sales, such as idle cash or shares in other companies, pull the turnover down.
Equity multiplier: how much is borrowed
Total assets divided by equity. It equals 1 plus total liabilities divided by equity, so it is the leverage lesson's total-liabilities-to-equity ratio plus 1. Titan's 1.27 for FY2023-24 becomes a multiplier of 2.27. A multiplier of 1.00 means no liabilities at all. Remember from the last lesson that "liabilities" here include everything owed, not only loans.
Titan and Info Edge, split into three
The table splits return on equity for both companies and both years, using closing balances so that each year stands on its own. A return calculated on average balances needs an opening balance sheet, which exists for FY2023-24 only and is given further down.
| Part | Titan FY2023-24 | Titan FY2022-23 | Info Edge FY2023-24 | Info Edge FY2022-23 |
|---|---|---|---|---|
| Net profit margin: profit after tax ÷ revenue | 7.52% | 8.71% | 34.99% | 19.05% |
| × Asset turnover: revenue ÷ total assets | 1.43 | 1.53 | 0.081 | 0.167 |
| = Return on assets | 10.78% | 13.29% | 2.82% | 3.18% |
| × Equity multiplier: total assets ÷ equity | 2.27 | 2.09 | 1.16 | 1.18 |
| = Return on equity | 24.51% | 27.79% | 3.27% | 3.76% |
Titan
Titan's return on equity fell from 27.8% to 24.5%. All three parts moved. The net margin slipped from 8.71% to 7.52%, asset turnover from 1.53 to 1.43, and the equity multiplier rose from 2.09 to 2.27 as the company borrowed more. To see how much each contributed, swap them one at a time, in the order margin, turnover, multiplier, holding the others at last year's values. The margin change contributed −3.79 percentage points, the lower turnover −1.44 and the higher multiplier +1.96, which together make the −3.27 points of the fall from 27.8% to 24.5%.
That reading is more useful than "return on equity fell". The business earned less on each sale and used its assets a little less hard, and borrowing cushioned the fall. Without the increase in borrowing the return would have dropped further. The margin points back to the cost of goods, covered in the first lesson of this module. The turnover points to a balance sheet that grew faster than sales, with more stock and investments. On average balances for FY2023-24, the return on equity is 26.8%, built from an asset turnover of 1.63 and a multiplier of 2.19.
Info Edge
Info Edge's net margin is the story's most striking figure: 19.05% in FY2022-23 and 34.99% in FY2023-24. Asset turnover is 0.081, which means that each rupee of assets produced about eight paise of revenue, and the multiplier is 1.16. Return on equity went from 3.8% to 3.3%, a fall of half a percentage point. The step-by-step split shows why: the higher margin contributed +3.15 percentage points, but the lower turnover contributed −3.58, and the multiplier −0.06. Asset turnover fell from 0.167 to 0.081 because revenue grew 10.3% while total assets grew 128.7%, the result of the fair value gain on investments in other companies, which are 84% of the assets. The business improved, and the balance sheet grew so much faster that the return on equity slipped. On average balances for FY2023-24, the return on equity is 4.6% and the asset turnover 0.112.
| Part, FY2023-24 | Titan | Info Edge |
|---|---|---|
| Net profit margin | 7.52% | 34.99% |
| × Asset turnover, on average total assets | 1.63 | 0.112 |
| × Equity multiplier, on average assets and equity | 2.19 | 1.17 |
| = Return on equity | 26.80% | 4.58% |
Going further: the five-step version
The three-step split folds interest and tax into the net margin. The five-step version separates them: return on equity equals the tax burden (profit after tax ÷ profit before tax) times the interest burden (profit before tax ÷ operating profit) times the operating margin times the asset turnover times the equity multiplier. With it you can say whether a fall in the net margin came from the business, from interest, or from tax. The principle is the same, the parts still cancel, and each added piece answers one more question. Finance texts and data providers use both versions, so check which one a quoted figure uses.
What the split cannot tell you
- The order of the swaps matters. Because the parts multiply, changing them in a different order gives slightly different contributions. The total is always the same. The split is a guide to which part mattered most, not an exact allocation.
- It explains and does not judge. A high return from a high multiplier is a different thing from a high return from a high margin, and the split does not say which is better. The leverage lesson did.
- It inherits every limit of its parts. Closing or average balances, one-off items in profit and gains in equity all pass straight through.
- It treats all assets alike. Idle cash, investments and operating assets all go into the denominator of turnover, which is why Info Edge's figure is so low.
- Industry patterns differ. High-volume, low-margin businesses and low-volume, high-margin ones can both earn good returns, so compare each part with similar firms.
Putting the module together
The five lessons of this module give you a reading order for any company's statements. Take the steps in turn and write down the formula you used for each.
- Growth and shares of revenue. Which lines moved, and did costs grow faster than sales? (Reading statements with ratios)
- Liquidity. Could the bills due this year be paid, and what is in the denominator? (Liquidity ratios)
- Margins and returns. What is kept from each sale, and what is earned on the money behind it? (Profitability ratios)
- Debt and cover. How much is owed, to whom, and could a bad year carry it? (Debt and coverage ratios)
- The split of the return. Which of margin, turnover and borrowing explains it? (this lesson)
- The cash behind the profit. Is the profit turning into cash? (Reading cash flow quality)
Applied to the two companies, the steps tell a coherent story. Titan sells a lot against its assets, keeps a thin and shrinking margin, and funded a year of investment with new borrowing, so its cover halved while remaining comfortable. Info Edge keeps a large margin on little revenue, owes lenders almost nothing, and holds a portfolio of shares that dominates its balance sheet and its return on equity. Neither is better. They are different kinds of business, and the ratios show how.
Three routes to a return on equity
DuPont analysis splits return on equity into three parts that multiply together: the net margin, asset turnover (revenue earned for each unit of assets) and the equity multiplier (assets for each unit of equity, a measure of how much of the business is funded by others). The table splits the return for Apple, Microsoft and Toyota, using average balances for the year and profit attributable to the owners of the parent company. Multiplying the three columns gives the return on equity in the last column.
| Latest year | Net margin (owners) | Asset turnover | Equity multiplier | Return on equity |
|---|---|---|---|---|
| Apple | 26.9% | 1.15× | 5.54× | 171.4% |
| Microsoft | 36.1% | 0.50× | 1.85× | 33.3% |
| Toyota | 9.9% | 0.52× | 2.62× | 13.6% |
Three companies, three different routes. Their paths show what a single return figure hides.
Reading each route
Microsoft: margin. A net margin of 36.1% is the highest of the three, asset turnover is low at 0.50 times because its balance sheet is heavy with data centres, goodwill and investments, and the equity multiplier of 1.85 is the lowest. A return of 33.3% comes with little help from borrowing, which is the most durable kind.
Apple: leverage and turnover. Its margin of 26.9% is lower than Microsoft's, but asset turnover of 1.15 times is more than twice as high, since it sells physical products from a lean balance sheet. The equity multiplier of 5.54 is the highest by a wide margin: average assets of $362,111 million rested on average equity of only $65,342 million. Both factors lift Apple's return above Microsoft's, and the multiplier alone, 5.54 against 1.85, nearly triples it. Of Apple's 171.4% against Microsoft's 33.3%, a large part is therefore the result of a policy of returning cash to shareholders.
Toyota: moderate on all three. Net margin of 9.9%, turnover of 0.52 times and an equity multiplier of 2.62 give 13.6%. Its multiplier is higher than Microsoft's because of the debt that funds the finance arm. The turnover is low for the same reason, since financial services receivables are a large part of its assets without bringing in much revenue in proportion.
Using the split across borders
The DuPont split is one of the most useful tools for comparing companies in different countries, because each factor is a ratio and so has no currency. It does not remove the effect of accounting standards, as the previous lessons showed, but it shows where the difference in return comes from. Two companies with the same return on equity can be very different businesses, one earning a thin margin on many sales and the other a fat margin on few, and the split makes that visible at once. When a return looks too good, look at the multiplier first.
Common mistakes
Treating a high return on equity as proof of quality
The lab raised it from 24.0% to 48.0% by changing only the multiplier. Check which part is doing the work.
Mixing closing and average balances
Titan's FY2023-24 return on equity is 24.5% on closing balances and 26.8% on average. Use one basis throughout a comparison.
Comparing asset turnover across different kinds of business
Titan's 1.43 and Info Edge's 0.081 describe different balance sheets: stock and shops against a portfolio of shares. Neither reflects efficiency alone.
Forgetting that liabilities in the multiplier are not all loans
The multiplier counts everything owed. Deferred tax and customers' advances raise it as much as a bank loan does, although they carry different risks.
Reading the contribution of each part as exact
The step-by-step figures depend on the order of the swaps. Use them to find the largest driver, not to quote to two decimals as a fact about the business.
Try it yourself
1. A company has a net margin of 5%, an asset turnover of 2.0 times and an equity multiplier of 3.0. Work out ROA and ROE.
Show the working
ROA = 5% × 2.0 = 10%. ROE = 10% × 3.0 = 30%. A third of the assets are funded by the owners, and the rest by liabilities.
2. Company A has a margin of 20%, turnover of 0.5 and a multiplier of 1.5. Company B has a margin of 3%, turnover of 4.0 and a multiplier of 1.5. Which has the higher return on equity, and what is different about how they earn it?
Show the working
A: 20% × 0.5 × 1.5 = 15%. B: 3% × 4.0 × 1.5 = 18%. B earns more despite a margin one-seventh as large, because it turns its assets eight times as fast. A keeps a lot of each sale and sells little against its assets.
3. Titan's total liabilities were ₹18,405 crore and its equity ₹14,457 crore at 31 March 2024. Work out its equity multiplier.
Show the working
Total assets equal liabilities plus equity: 18,405 + 14,457 = 32,862. Multiplier = 32,862 ÷ 14,457 = 2.27. Equivalently, 1 + 18,405 ÷ 14,457 = 1 + 1.27.
4. Info Edge's net margin rose from 19.05% to 34.99%, yet its return on equity slipped from 3.8% to 3.3%. Which part explains it?
Show the working
Asset turnover, which fell from 0.167 to 0.081. Revenue grew 10.3%, but total assets grew 128.7% because the investments in other companies were revalued upwards. The margin effect of +3.15 points was outweighed by a turnover effect of −3.58.
Where this is used
- An equity analyst uses DuPont to explain why a company's return on equity differs from a rival's, and whether the gap is margin, asset use or borrowing.
- A board asks which of the three parts management can change: price and cost for the margin, stock and receivables for turnover, financing for the multiplier.
- A lender looks at the multiplier to see how much of a high return depends on borrowed money.
- A student of finance uses it to practise tracing a headline ratio back to the statements it came from.
Key terms
- DuPont analysis
- Splitting return on equity into net profit margin, asset turnover and the equity multiplier.
- Net profit margin
- Profit after tax divided by revenue.
- Asset turnover
- Revenue divided by total assets. How many rupees of sales each rupee of assets produces in a year.
- Equity multiplier
- Total assets divided by equity. It equals 1 plus total liabilities divided by equity.
- Return on assets
- Profit after tax divided by total assets. Equal to margin times asset turnover.
- Return on equity
- Profit after tax divided by equity. Equal to margin times turnover times multiplier.
- Percentage point
- The difference between two percentages. Moving from 27.8% to 24.5% is a fall of 3.3 percentage points.
Questions people ask
Is a higher equity multiplier better?
It raises the return in good years and magnifies losses in bad ones. It is a choice about risk, not a sign of skill. The leverage lesson shows how to check whether the profit can carry it.
Why use total assets and not capital employed?
Because total assets divided by equity is the multiplier that makes the identity work. Return on capital employed answers a related question with a different base, and it was in the profitability lesson.
Why is Info Edge's asset turnover so low?
Because most of its assets are investments in other companies, which do not produce its sales. The sales come from the services business, which needs few assets.
Can I use DuPont on a bank?
Not in the same way. For a bank, lending is the business, so the roles of revenue, assets and liabilities differ. Banks have their own ratio frameworks.
Sources and review
- Titan Company Limited, audited standalone and consolidated financial results for the year ended 31 March 2024, filed with BSE. Source of every Titan figure.
- Info Edge (India) Limited, audited standalone financial statements, Q4 FY24. Source of every Info Edge figure.
- AnalystPrep, DuPont Analysis of Return on Equity, for the three-step and five-step formulas and the use of average balances.
- CPA British Columbia, Financial ratio analysis (guidance), for the practice of dividing an income statement figure by an average balance sheet amount.
- Wikipedia, DuPont analysis, for the origin of the method at the DuPont company.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
How the numbers were checked: both companies' statements were rebuilt from the printed lines and every total matched. For each company and year the three parts were multiplied back and compared with profit divided by equity, and they agreed to within rounding of the computer arithmetic. Titan's multiplier was also checked against 1 plus liabilities divided by equity. The step-by-step contributions were checked to add up to the total change in each case. The calculator was tested against separate arithmetic across thousands of slider combinations.