The DuPont Model is a methodology that computes Return on Equity by component parts.
Business owners and shareholders are very interested in their level of return.
A method of consulting with business owners and shareholders on ways to boost Return on Equity would be very valuable to the CPA.
The DuPont Model was first used by the DuPont Corporation in the 1920’s. It breaks down the Return on Equity formula into three basic components; Net Profit Margin, Asset Turnover and Equity Multiplier. This can be used in conjunction with industry averages or competitor information to pinpoint opportunities to improve Return on Equity (ROE).
ROE = Net Profit Margin x Asset Turnover x Equity Multiplier
or ROE = (Net Income / Sales) x (Sales / Total Assets) x (Total Assets / Equity).
Some of the calculations did not show well in the blog so click here to access the PDF file on the Dupont Model.