# What Is the DuPont Equation? Published: 2025-10-16 Author: Warren Team URL: https://www.heywarren.com/blog/dupont-equation --- Warren Buffett once said he could learn everything he needed to know about a business from a single number — but that number is meaningless without knowing *why* it is what it is. The dupont equation exists precisely to answer that question. Most investors fixate on [return on equity (ROE)](/blog/return-on-equity) as a measure of business quality. The problem is that two companies can report identical ROE figures for completely opposite reasons: one earns it through razor-thin margins on massive volume, the other through aggressive debt-fueled leverage. Treating them the same way is a costly mistake. The dupont equation tears ROE apart into its component drivers, revealing the true source of a company's profitability. By the end of this guide, you will know how to calculate the [DuPont formula](/blog/dupont-formulas) from scratch, interpret each component, apply it to real companies, and avoid the common traps that trip up even experienced analysts. According to a 2023 CFA Institute survey, fewer than 35% of retail investors can correctly identify all three components of the classic DuPont model — which means understanding it gives you a meaningful edge. --- ## What Is the DuPont Equation? The dupont equation is a financial framework that breaks [return on equity](/blog/calculate-roe) into three multiplicative components: net [profit margin](/blog/how-do-i-calculate-profit-margin), asset turnover, and the equity multiplier. By multiplying these three ratios together, analysts can pinpoint whether a company's ROE is driven by operational efficiency, asset productivity, or financial leverage — or some combination of all three. ![ROE decomposes into three multiplicative drivers: profitability, efficiency, and leverage.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20600%20211%22%20width%3D%22600%22%20height%3D%22211%22%20role%3D%22img%22%3E%3Ctitle%3EHierarchy%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Crect%20x%3D%22220%22%20y%3D%2220%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22%232563eb%22%2F%3E%3Ctext%20x%3D%22300%22%20y%3D%2254%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22white%22%3EROE%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20120%20105.5%20L%20120%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%2240%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22120%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ENet%20Profit%20Margin%3C%2Ftext%3E%3Ctext%20x%3D%22120%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3ENet%20Income%20%2F%20Revenue%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20300%20105.5%20L%20300%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22220%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22300%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EAsset%20Turnover%3C%2Ftext%3E%3Ctext%20x%3D%22300%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3ERevenue%20%2F%20Total%20Assets%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20480%20105.5%20L%20480%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22400%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22480%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EEquity%20Multiplier%3C%2Ftext%3E%3Ctext%20x%3D%22480%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3ETotal%20Assets%20%2F%20Equity%3C%2Ftext%3E%3C%2Fsvg%3E) *ROE decomposes into three multiplicative drivers: profitability, efficiency, and leverage.* The formula looks like this: **ROE = Net Profit Margin × Asset Turnover × Equity Multiplier** Or in expanded form: **ROE = (Net Income / Revenue) × (Revenue / Total Assets) × (Total Assets / Shareholders' Equity)** Notice that revenue cancels out between the first and second terms, and total assets cancels out between the second and third. The result simplifies neatly to net income divided by shareholders' equity — which is ROE. The magic is not in the math; it is in what each individual factor reveals. The DuPont model was developed by Donaldson Brown, a financial analyst at E.I. du Pont de Nemours and Company, in 1914. General Motors later popularized it widely. Over a century later, it remains one of the most powerful diagnostic tools in fundamental analysis. --- ## Breaking Down the Three Components of DuPont Analysis Each factor in the DuPont formula measures a distinct dimension of business performance. Understanding all three is essential before you can interpret any company's ROE with confidence. ### Net Profit Margin Net profit margin measures how much of each revenue dollar survives after all costs — including cost of goods sold, operating expenses, interest, and taxes. A 10% net margin means the company keeps $0.10 for every $1.00 of sales. High-margin businesses tend to have pricing power, strong brands, or proprietary products. Think luxury goods, enterprise software, or pharmaceutical patents. Apple's net margin has consistently hovered around 25%, which is extraordinary for a hardware company at its scale. The key question: is a declining ROE happening because margins are compressing? If so, is it competitive pricing pressure, rising input costs, or operational inefficiency? ### Asset Turnover Ratio Asset turnover measures how efficiently a company generates revenue from its asset base. A ratio of 1.5 means the company produces $1.50 in sales for every $1.00 of assets on the balance sheet. Retailers and grocery chains typically have high asset turnover because they move enormous volumes of product relative to their asset base. Walmart, for example, consistently posts asset turnover above 2.0. Capital-intensive manufacturers or utilities, by contrast, often run below 0.5. Low asset turnover is not automatically a problem — it often pairs with high margins in industries like semiconductors or pharmaceuticals. DuPont analysis helps you see which combination is actually driving performance. ### Equity Multiplier The equity multiplier reflects financial leverage: how much of the company's assets are financed by debt rather than equity. A multiplier of 3.0 means the company holds $3.00 of assets for every $1.00 of equity — implying two-thirds of its asset base is debt-funded. Higher leverage amplifies ROE in good times. But it also amplifies losses when earnings fall short. A bank with a 12x equity multiplier earns spectacular returns in a benign credit environment — and faces existential risk during a credit crisis. --- ## How to Calculate the DuPont Equation Step by Step Applying the dupont equation to a real company takes less than five minutes once you know where to find the inputs. Here is a systematic walkthrough using a hypothetical retailer, MidWest Goods Inc., for the fiscal year ending December 2024. **Step 1: Gather the financial statement data.** - Net Income: $120 million - Revenue: $1.5 billion - Total Assets: $900 million - Shareholders' Equity: $300 million **Step 2: Calculate net profit margin.** $120M ÷ $1,500M = **8.0%** **Step 3: Calculate asset turnover.** $1,500M ÷ $900M = **1.67x** **Step 4: Calculate the equity multiplier.** $900M ÷ $300M = **3.0x** **Step 5: Multiply the three components.** 0.08 × 1.67 × 3.0 = **0.40, or 40% ROE** Now you know that MidWest Goods earns a 40% return on equity — and more importantly, you know it is getting there with moderate margins, reasonably efficient asset use, and 3:1 leverage. That is a very different risk profile than a company achieving 40% ROE purely through 15x leverage and 1.5% margins. --- ## The Five-Factor DuPont Model: A Deeper Decomposition The classic three-factor dupont equation is powerful, but it bundles operating performance, interest costs, and taxes together inside net profit margin. The five-factor DuPont model separates these to give analysts even finer diagnostic resolution. ![The five-factor model splits net margin into tax burden, interest burden, and EBIT margin for finer diagnostics.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%201090%20125%22%20width%3D%221090%22%20height%3D%22125%22%20role%3D%22img%22%3E%3Ctitle%3EFlow%20diagram%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Crect%20x%3D%2230%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22115%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ETax%20Burden%3C%2Ftext%3E%3Ctext%20x%3D%22115%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3ENI%20%2F%20Pretax%20Inc.%3C%2Ftext%3E%3Cline%20x1%3D%22205%22%20y1%3D%2262.5%22%20x2%3D%22237%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22244%2C62.5%20235%2C57.5%20235%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22245%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22330%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EInterest%20Burden%3C%2Ftext%3E%3Ctext%20x%3D%22330%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3EPretax%20%2F%20EBIT%3C%2Ftext%3E%3Cline%20x1%3D%22420%22%20y1%3D%2262.5%22%20x2%3D%22452%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22459%2C62.5%20450%2C57.5%20450%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22460%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22545%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EEBIT%20Margin%3C%2Ftext%3E%3Ctext%20x%3D%22545%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3EEBIT%20%2F%20Revenue%3C%2Ftext%3E%3Cline%20x1%3D%22635%22%20y1%3D%2262.5%22%20x2%3D%22667%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22674%2C62.5%20665%2C57.5%20665%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22675%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22760%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EAsset%20Turnover%3C%2Ftext%3E%3Ctext%20x%3D%22760%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3ERevenue%20%2F%20Assets%3C%2Ftext%3E%3Cline%20x1%3D%22850%22%20y1%3D%2262.5%22%20x2%3D%22882%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22889%2C62.5%20880%2C57.5%20880%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22890%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22975%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EEquity%20Multiplier%3C%2Ftext%3E%3Ctext%20x%3D%22975%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3EAssets%20%2F%20Equity%3C%2Ftext%3E%3C%2Fsvg%3E) *The five-factor model splits net margin into tax burden, interest burden, and EBIT margin for finer diagnostics.* The five-factor formula is: **ROE = Tax Burden × Interest Burden × EBIT Margin × Asset Turnover × Equity Multiplier** Where: - **Tax Burden** = Net Income / Pretax Income (how much profit survives taxes) - **Interest Burden** = Pretax Income / EBIT (how much EBIT survives interest payments) - **EBIT Margin** = EBIT / Revenue (operating profitability) ### Tax Burden and Interest Burden These two ratios isolate non-operating drag. A tax burden of 0.75 means the company retains 75 cents of every pre-tax dollar — implying a 25% effective tax rate. A lower interest burden (say, 0.60) signals that interest expense is eating 40% of operating profit, flagging potentially dangerous debt levels. Comparing these factors over time reveals whether a deteriorating ROE is an operational story or a balance-sheet story. If the EBIT margin holds steady but the interest burden collapses, the company is not getting worse at its core business — it just borrowed too much. ### Operating Margin and Asset Efficiency The five-factor version keeps EBIT margin (operating profit as a percentage of revenue) separate from the tax and interest distortions below the operating line. This lets you compare operational performance across companies in different tax jurisdictions or with different capital structures on equal footing. Pairing EBIT margin with asset turnover in the five-factor model produces what analysts sometimes call **[return on assets](/blog/roa-calculation) before leverage effects** — an exceptionally clean measure of how well management is deploying the assets entrusted to them. --- ## Real-World DuPont Analysis: Two Companies, Same ROE One of the best ways to internalize the DuPont framework is to compare two companies that report identical ROE through completely different paths. Consider a simplified comparison for fiscal year 2023: ![A luxury brand and discount retailer both reach 30% ROE through opposite margin and turnover profiles.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20800%20210%22%20width%3D%22800%22%20height%3D%22210%22%20role%3D%22img%22%3E%3Ctitle%3EComparison%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Ctext%20x%3D%22230%22%20y%3D%2257.5%22%20text-anchor%3D%22end%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ELuxury%20Brand%20%28Margin%29%3C%2Ftext%3E%3Crect%20x%3D%22240%22%20y%3D%2225%22%20width%3D%22450%22%20height%3D%2255%22%20rx%3D%226%22%20fill%3D%22%232563eb%22%2F%3E%3Ctext%20x%3D%22702%22%20y%3D%2257.5%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22%232563eb%22%3E%2520%3C%2Ftext%3E%3Ctext%20x%3D%22230%22%20y%3D%22152.5%22%20text-anchor%3D%22end%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EDiscount%20Retailer%20%28Marg%E2%80%A6%3C%2Ftext%3E%3Crect%20x%3D%22240%22%20y%3D%22120%22%20width%3D%2256.25%22%20height%3D%2255%22%20rx%3D%226%22%20fill%3D%22%237c3aed%22%2F%3E%3Ctext%20x%3D%22308.25%22%20y%3D%22152.5%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22%237c3aed%22%3E%252.5%3C%2Ftext%3E%3C%2Fsvg%3E) *A luxury brand and discount retailer both reach 30% ROE through opposite margin and turnover profiles.* **Company A — Luxury Brand (e.g., LVMH-type profile)** - Net Margin: 20% - Asset Turnover: 0.75x - Equity Multiplier: 2.0x - **ROE = 30%** **Company B — Discount Retailer (e.g., Costco-type profile)** - Net Margin: 2.5% - Asset Turnover: 3.5x - Equity Multiplier: 3.4x - **ROE = ~30%** Both post 30% ROE. But Company A earns it almost entirely through brand-driven pricing power. Company B earns it by turning over inventory at blistering speed and running on thin margins with meaningful leverage. The investment implications diverge sharply. Company A's ROE is durable as long as the brand holds. Company B's ROE depends on volume assumptions and credit availability. In a recession where consumers pull back, Company B faces a double squeeze: falling throughput and rising financing costs. Company A's wealthy clientele spends through mild downturns. This is precisely why the dupont equation is considered a prerequisite tool for serious equity analysis. --- ## Common Mistakes Analysts Make With the DuPont Formula Even sophisticated analysts misuse the DuPont model. Here are the four most common errors — and how to avoid them. **1. Treating high ROE as automatically good.** A company with a 50% ROE driven entirely by a 20x equity multiplier is not impressive — it is fragile. Always decompose before celebrating the headline number. **2. Ignoring negative equity edge cases.** When shareholders' equity is negative (common in companies with large share buybacks, like McDonald's), ROE becomes mathematically negative or meaningless even when the company is highly profitable. The dupont equation breaks down at this boundary. Switch to return on invested capital (ROIC) in these situations. **3. Using beginning-of-period vs. end-of-period assets inconsistently.** Some analysts use year-end assets; others use an average of beginning and ending balance. The choice matters for asset turnover. Pick one method and apply it consistently when comparing across companies or time periods. **4. Ignoring off-balance-sheet items.** Operating leases, pension obligations, and securitized receivables can all inflate apparent asset turnover by keeping real economic assets off the balance sheet. Always check footnotes before concluding a company is genuinely asset-efficient. --- ## Why the DuPont Equation Matters for Long-Term Investors The dupont equation is not just an academic exercise. It directly improves three practical investment decisions. **Screening for quality businesses.** When screening for high-ROE companies, applying DuPont filters lets you separate businesses with real competitive advantages (high margins, strong asset productivity) from those that are simply leveraged up. Focusing on companies where both net margin and asset turnover are above industry medians identifies genuinely efficient operators. **Tracking management performance over time.** Running the DuPont decomposition annually for the same company reveals whether management is improving operations or simply borrowing more to boost reported returns. A rising equity multiplier alongside flat margins is a yellow flag. Rising margins with stable leverage is the pattern you want to see. **Comparing across industries fairly.** Raw ROE comparisons across industries are almost meaningless — a utility and a software company operate under completely different capital structures and margin profiles. DuPont analysis lets you isolate the specific dimension (margins, asset turns, leverage) where one company genuinely outperforms another, even when they occupy different sectors. Warren Buffett's concept of "owner earnings" and his preference for businesses with high returns on equity *without* requiring heavy reinvestment maps almost perfectly onto the DuPont lens: companies where ROE is driven by margins and asset efficiency, not by financial engineering. --- ## Authoritative Sources For deeper background and primary-source data on this topic, the following authoritative sources are useful starting points: - [IRS](https://www.irs.gov/) - [SEC](https://www.sec.gov/) - [Federal Reserve](https://www.federalreserve.gov/) - [Consumer Financial Protection Bureau](https://www.consumerfinance.gov/) - [U.S. Department of the Treasury](https://home.treasury.gov/) - [Bureau of Labor Statistics](https://www.bls.gov/) ## Conclusion The dupont equation transforms a single, opaque profitability metric into a three-dimensional picture of business performance. Here are the key takeaways from this guide: - **ROE alone tells you nothing.** The DuPont model reveals *why* a company earns its return — whether through margins, asset efficiency, or leverage. - **The three-factor formula** (Net Margin × Asset Turnover × Equity Multiplier) is the standard starting point and takes under five minutes to calculate. - **The five-factor extension** separates operating performance from tax and interest effects, enabling cleaner cross-company comparisons. - **Same ROE, different risk.** Two companies can post identical ROE through completely different paths — and carry completely different investment risk profiles. - **Watch for red flags:** leverage-driven ROE, negative equity distortions, and off-balance-sheet assets all require adjustments before the model is trustworthy. Used consistently, DuPont analysis helps you distinguish durable, competitively advantaged businesses from companies that are simply borrowing their way to attractive headline numbers. That distinction is worth more than almost any other analytical skill in a long-term investor's toolkit. Ready to put this knowledge to work? Try Warren, your AI financial advisor — get personalized, conflict-free guidance at heywarren.com