5 Step DuPont Analysis for ROE | Financial Statement Analysis [Video]

The 3-step DuPont analysis is helpful in that it breaks ROE into 3 components. However, the 3-step DuPont doesn’t fully isolate the effect of the firm’s financing decisions because it measures profit margin as net income divided by sales. The 5-step DuPont analysis corrects for this by using operating margin instead of profit margin and separately measuring the interest burden and the tax burden.

The 5-step DuPont Analysis thus disaggregates return on equity (ROE) into 5 components:

ROE = [(operating margin * asset turnover) – interest burden] * equity multiplier * (1 – tax rate)
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