Can someone break down the 3-step and 5-step DuPont decomposition with a real example?

DuPont analysis is one of the most testable frameworks in CFA Level I FRA because it connects profitability, efficiency, and leverage into a single coherent picture of return on equity.

3-Step DuPont:

$$ROE = \text{Net Profit Margin} \times \text{Asset Turnover} \times \text{Equity Multiplier}$$

$$ROE = \frac{\text{Net Income}}{\text{Revenue}} \times \frac{\text{Revenue}}{\text{Total Assets}} \times \frac{\text{Total Assets}}{\text{Equity}}$$

5-Step DuPont decomposes net profit margin further:

$$ROE = \text{Tax Burden} \times \text{Interest Burden} \times \text{EBIT Margin} \times \text{Asset Turnover} \times \text{Equity Multiplier}$$

$$ROE = \frac{NI}{EBT} \times \frac{EBT}{EBIT} \times \frac{EBIT}{Revenue} \times \frac{Revenue}{Assets} \times \frac{Assets}{Equity}$$

Worked Example: Halcyon Consumer Goods

3-Step (2025):

• Net Profit Margin = 75.6/840 = 9.0%
• Asset Turnover = 840/600 = 1.40x
• Equity Multiplier = 600/240 = 2.50x
• ROE = 9.0% x 1.40 x 2.50 = 31.5%

5-Step (2025):

• Tax Burden = 75.6/100.8 = 0.75 (25% tax rate)
• Interest Burden = 100.8/126 = 0.80
• EBIT Margin = 126/840 = 15.0%
• Asset Turnover = 1.40x
• Equity Multiplier = 2.50x
• ROE = 0.75 x 0.80 x 15.0% x 1.40 x 2.50 = 31.5%

Why the 5-step matters: It reveals whether ROE changes are driven by operating efficiency (EBIT margin), financing costs (interest burden), or tax policy (tax burden). If Halcyon's ROE drops next year, the 5-step tells you exactly which lever moved.

Exam tip: When a vignette gives you two years of data and asks what drove the ROE change, decompose both years with the 5-step and compare each component. That's the classic CFA Level I item set format.

For more DuPont practice problems, explore our CFA Level I question bank.