DuPont analysis decomposes ROE into which three components?

• A. Net profit margin, asset turnover, and financial leverage (equity multiplier)
• B. Operating margin, asset turnover, debt ratio
• C. Net profit margin, cash conversion cycle, inventory turnover
• D. Gross margin, asset turnover, equity capital

Answer: (A)

Three building blocks drive ROE in the DuPont framework: profitability, efficiency, and leverage. Net income is earned relative to sales, so the net profit margin (net income / sales) shows how much profit each dollar of sales leaves behind. Asset turnover (sales / average total assets) measures how effectively assets generate those sales. The equity multiplier (average total assets / average shareholders’ equity) captures financial leverage, indicating how much of the asset base is funded by debt versus equity. Multiplying these three factors gives ROE: Net Profit Margin × Asset Turnover × Equity Multiplier. This is why the combination of net profit margin, asset turnover, and financial leverage best fits the DuPont decomposition. The other options mix metrics that aren’t part of the DuPont identity (such as operating margin, debt ratio, cash conversion cycle, or gross margin), so they don’t represent the standard ROE breakdown.