The DuPont analysis is a method for assessing a company's return on equity (ROE).

It is
also often called the DuPont identity. The DuPont analysis breaks down a company's ROE
by analyzing asset efficiency or turnover ratio, operating efficiency and financial leverage—
this approach measures a company's gross book value. In contrast, other analysis resources
look at a company's net value to assess ROE, which doesn't analyze as deeply as the DuPont
method and therefore may not be as accurate. The DuPont analysis was pioneered in large
part by the DuPont Corporation, which was founded in the 1920s.

ROE refers specifically to the value a stockholder may expect from their holdings. It can be
calculated simply by taking a company’s net income and dividing it by the shareholders’
equity. A high ROE is usually a good indicator that a company is worth investing in. This,
however, can be misleading. A company may boost their ROE by taking on new leverage, or
debt, but at the ultimate expense of the shareholder. By peering further beneath the surface
of a company’s financial practices, the DuPont Analysis attempts to provide more reliable
and, therefore, safe ROE calculations for investors.

To assess ROE, the DuPont Analysis measures how well a company manages its assets
versus its leverage. This is done by measuring the turnover ratio of assets and comparing it
with how much leverage the company is holding and taking on. It then analyzes a
company's operating efficiency, which is determined by profit margin, or how much of its
earnings a company is actually able to keep.

As opposed to the simplest way of calculating ROE, DuPont’s multi-faceted calculation may
be better able to detect whether and where a company has financial baggage. As a result, an
investor may be less likely to invest in a company that, though appealing on the surface,
may ultimately have weak returns resulting from bad profit margins or bloated leverage. It
also can help protect investors from putting money into companies that have artificially
raised their ROE, perhaps by taking on more leverage, in order to pull in more investors.

The DuPont analysis may also be useful for a company wishing to take its own financial
pulse. Executives may be aware that their company is under performing, but may need a
method for finding the source of the problem. Using an assessment system such as the
DuPont analysis may help company leaders locate the source of a financial problem so
steps can be taken to rectify it.

The DuPont analysis may not be useful in analyzing all industries. For example, a bank may
use assets and leverage differently than a retail chain does, which may make it difficult to
obtain the best assessments for both industries using the same analysis method. For such
cases, there are other thorough methods of analyzing ROE besides the DuPont method. For
example, some investors use a 5-year method of assessing ROE, relying on time to detect
any flaws in a company's financial practices.