What are the three components of ROE in the DuPont analysis?

• A. Profit margin, asset turnover, and financial leverage (equity multiplier).
• B. Net income, total assets, and equity.
• C. Revenue, assets, and equity.
• D. Profit margin, gross margin, and tax rate.

Answer: (A)

DuPont analysis breaks ROE into three parts: profit margin, asset turnover, and the equity multiplier (financial leverage). ROE is net income divided by equity, and through the decomposition it becomes (net income / revenue) × (revenue / assets) × (assets / equity). The first factor shows how much profit is earned from each dollar of sales, the second reflects how efficiently assets generate sales, and the third captures how much of the asset base is funded by debt versus equity. Together, they explain why ROE changes: higher margins, faster turnover, or greater leverage all raise ROE (though leverage also brings more risk). The other options don’t fit because they mix totals or measurements not part of the DuPont breakdown, such as gross margin or tax rate.