DuPont analysis

Splitting return on equity into three drivers: net profit margin, asset turnover and financial leverage. Multiply them and you get back the return you started with.

A company with a 12.8% net margin, 0.774 times asset turnover and 1.879 times leverage returns 18.6% on equity.

The value is diagnostic. Two firms both returning 18.6% can be entirely different businesses: a luxury brand with a fat margin and slow turnover, and a supermarket with a thin margin and rapid turnover. The decomposition tells you which lever moved when the return changes, and it separates the three ways management can raise it, one of which is simply borrowing more.

The five-step version splits margin further into an operating margin, an interest burden and a tax burden, which isolates how much of a return improvement came from cheaper debt or a tax break rather than from trading.

Run it across five years. The pattern is the finding.