Can someone explain DuPont analysis with both the 3-component and 5-component decompositions?

DuPont analysis decomposes Return on Equity into its drivers, revealing WHY a company's ROE is high or low.

3-Component DuPont:

ROE = Net Profit Margin x Asset Turnover x Equity Multiplier

Or: ROE = (Net Income / Revenue) x (Revenue / Total Assets) x (Total Assets / Equity)

5-Component DuPont (Extended):

ROE = (Tax Burden) x (Interest Burden) x (EBIT Margin) x (Asset Turnover) x (Equity Multiplier)

Where:

• Tax burden = Net Income / EBT
• Interest burden = EBT / EBIT
• EBIT margin = EBIT / Revenue

Comparison Example:

Caldera Retail (3-component):

• Net Profit Margin: $28.7M / $820M = 3.5%
• Asset Turnover: $820M / $410M = 2.00x
• Equity Multiplier: $410M / $164M = 2.50x
• ROE = 3.5% x 2.00 x 2.50 = 17.5%

Fennworth Luxury (3-component):

• Net Profit Margin: $41.6M / $320M = 13.0%
• Asset Turnover: $320M / $260M = 1.23x
• Equity Multiplier: $260M / $130M = 2.00x
• ROE = 13.0% x 1.23 x 2.00 = 32.0%

Interpretation:

• Caldera achieves ROE through high asset turnover (retail model) and leverage, despite thin margins
• Fennworth achieves higher ROE primarily through superior profitability (luxury pricing power)
• Fennworth's approach is more sustainable — high-leverage ROE is riskier

5-Component for Caldera:

• Tax burden: $28.7M / $38M = 0.755
• Interest burden: $38M / $52M = 0.731
• EBIT margin: $52M / $820M = 6.3%
• Shows that interest expense significantly erodes Caldera's profitability (burden of 0.731 vs closer to 1.0 for low-debt firms)

Practice DuPont decomposition with our CFA Level I question bank on AcadiFi.