The DuPont identity
The determinants of a firm’s return on equity (ROE) can be analysed using a tool called the ‘DuPont identity’, named for the company that popularised its use. The DuPont identity expresses the ROE in terms of the firm’s profitability, asset efficiency and leverage.
When to use it
- To analyse a firm’s financial performance.
- To drill down on the underlying drivers of profitability.
- To compare the performance of competing firms.
The methodology for financial analysis that we now call the DuPont identity was invented in 1914 by F. Donaldson Brown, an electrical engineer employed by E.I. DuPont de Nemours and Company (DuPont). After DuPont bought a stake in General Motors Corp. (GM), Brown was put in charge of ...