5 step DuPont Equation

As show in this article, we can dissect the ROE with a 3 step DuPont Equation

• ROE = Net Income/Equity 
• = Net Income/Sales * Sales/Total Assets * Total Assets / Equity -
  The sales and total asset on the right side of the equation negate each other, seeing as one is in the numerator and one is in the denominator
• = Net Income Margin * Asset Turn Over * Financial Leverage

With the three step model, you see whether a company is boosting ROE through improved profitability, asset turnover or financial leverage. While a 5 step DuPont Equation, break down the Net Income Margin to show you how tax and interest affect ROE.

•  ROE = Net Income/Equity
• = Net Income/Pretax Income * Pretax Income/EBIT * EBIT/Sales * Sales/Total Assets * Total Assets/ Equity
• = Tax Burden * Interest Burden * Operating Margin * Asset Turnover * Equity Multiplier 
• Tax burden is the proportion of profits retained after paying taxes
• Interest burden shows how interest is affecting profits. If a company has no debt, the ratio will be 1. 
• Operating income margin is the operating income per dollar of sales 
• Asset turnover shows asset utilization efficiency
• Equity multiplier shows financial leverage

References:-

• 5 Step DuPont Analysis - Jae Jun