Finance
5-Factor DuPont ROE: Tax Burden, Interest Burden & EBIT Margin
Decompose ROE into five accounting ratios, reconcile their unrounded product to net income over average equity, and distinguish undefined factors from a still-defined direct ROE.
Five ratios that cancel to net income over average equity
The five-factor identity is (NI/EBT)*(EBT/EBIT)*(EBIT/revenue)*(revenue/average assets)*(average assets/average equity). Use a consistent reporting period, currency scale, consolidation scope and equity/income attribution basis. Average assets and equity should reflect the same period, not an arbitrary mix of closing and average balances.
The identity is accounting arithmetic, not proof that a change in leverage or taxes caused a change in performance. EBT/EBIT reflects net interest and any other reconciling non-operating items; a debt-free company does not necessarily have a ratio of 1.
NI/EBT equals one minus an effective income-tax fraction only when net income and pretax earnings reconcile through the relevant tax expense on the same basis. It is not automatically one minus a statutory tax rate. Debt principal repayments are not part of an earnings-based interest-burden ratio.
For the baseline the five factors are 0.75, 0.8, 0.16, 1.25 and 2, whose product is 0.24. A separate sensitivity changes EBT to 48 and NI to 36 while keeping the other inputs fixed; the resulting ROE is 0.18. This is an assumed scenario, not an identified causal effect.
With negative EBIT or EBT the algebra can still work if denominators are nonzero, but retention-factor interpretations become difficult. Zero EBIT or EBT makes the factor chain undefined even when direct NI/equity remains defined. This exercise restricts the combined interpretation to positive revenue, average assets and equity.
Tax-burden ratio NI/EBT, D2
Keep this ratio unrounded for the final reconciliation. A zero denominator is explicitly reported.
=IF(COUNT(B5,B4)<>2,"Enter numeric numerator and denominator",IF(B4=0,"Ratio undefined: zero denominator",B5/B4))Interest-burden ratio EBT/EBIT, D3
Keep this ratio unrounded for the final reconciliation. A zero denominator is explicitly reported.
=IF(COUNT(B4,B3)<>2,"Enter numeric numerator and denominator",IF(B3=0,"Ratio undefined: zero denominator",B4/B3))EBIT margin, D4
Keep this ratio unrounded for the final reconciliation. A zero denominator is explicitly reported.
=IF(COUNT(B3,B2)<>2,"Enter numeric numerator and denominator",IF(B2=0,"Ratio undefined: zero denominator",B3/B2))Asset turnover, D5
Keep this ratio unrounded for the final reconciliation. A zero denominator is explicitly reported.
=IF(COUNT(B2,B6)<>2,"Enter numeric numerator and denominator",IF(B6=0,"Ratio undefined: zero denominator",B2/B6))Equity multiplier, D6
Keep this ratio unrounded for the final reconciliation. A zero denominator is explicitly reported.
=IF(COUNT(B6,B7)<>2,"Enter numeric numerator and denominator",IF(B7=0,"Ratio undefined: zero denominator",B6/B7))Five-factor product, D7
Requires all six financial inputs. It allows negative earnings but reports zero EBIT or EBT as undefined.
=IF(COUNT(B2:B7)<>6,"Enter all six numeric financial inputs",IF(OR(B2<=0,B6<=0,B7<=0),"Require positive revenue, average assets and equity",IF(OR(B3=0,B4=0),"Five-factor product undefined: zero EBIT or EBT",D2*D3*D4*D5*D6)))Direct ROE, D8
NI divided by positive average equity provides an independent reconciliation and remains computable when EBIT or EBT is zero.
=IF(COUNT(B5,B7)<>2,"Enter numeric net income and equity",IF(B7<=0,"Average equity must be positive",B5/B7))Combined NI/EBIT ratio, D9
This direct ratio may remain defined when EBT is zero, although the separate tax and interest factor product does not.
=IF(COUNT(B5,B3)<>2,"Enter numeric numerator and denominator",IF(B3=0,"Ratio undefined: zero denominator",B5/B3))Try the example
Use the original values or change them to test your understanding.