How many component ratios make up the DuPont identity? Three. The classic DuPont identity expresses return on equity (ROE) as profit margin × total asset turnover × equity multiplier.
The framework links three different aspects of performance: profitability, operating efficiency, and financial leverage. Profit margin measures earnings from each unit of sales; asset turnover measures how effectively assets generate revenue; and the equity multiplier reflects assets financed per unit of shareholders’ equity.
DuPont developed the method for internal analysis in the 1920s, building on work associated with engineer and finance executive Donaldson Brown. It helps analysts diagnose why two companies have different ROE figures. A high ROE might come from strong margins, rapid asset turnover, or substantial leverage—and those causes carry different risks.
A common mix-up is confusing the classic three-step identity with expanded versions. More detailed models split profit margin into tax and interest effects, producing five or more ratios, but those are extensions rather than the classic three-part DuPont identity.