In the DuPont framework, the equity multiplier captures the effect of which concept?

• A. Profit margin
• B. Financial leverage
• C. Asset turnover
• D. Cash flow efficiency

Answer: (B)

In DuPont analysis, the equity multiplier reflects how a company finances its assets with debt, i.e., financial leverage. It is defined as average total assets divided by average shareholders’ equity, and it shows how much of the asset base is funded by debt versus equity. A higher equity multiplier means more debt financing, which can amplify return on equity if profits are solid, but also increases financial risk. In the ROE decomposition, ROE = net profit margin × asset turnover × equity multiplier, so this component specifically captures leverage. The other parts correspond to profitability (net profit margin) and asset efficiency (asset turnover); cash flow efficiency isn’t a standard DuPont component.