What is the DuPont Identity?

Finance Dec 19, 2020

Expert Solution

Also called DuPont Analysis, the DuPont Identity is used to analyze a company's return on equity. This means that is serves as an analysis of potential growth rate and overall profitability.

The formula combines three common ratios to calculate equity. They are net profit margin, asset turnover, and the equity multiplier. The formula is:

ROE (return on equity) = Profit Margin (net income/sales) x Asset Turnover (revenue/total assets) x Equity Multiplier (total assets/shareholder equity)

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