Definitions DuPont Chain

This equation is commonly known as the DuPont Chain:

Return On Sales x Asset Turnover x Leverage = Return on Equity

While two companies might have the same Return on Equity (ROE), they could achieve those returns in very different ways. A company that sells differentiated products with high margins and low unit volume would have a DuPont Chain with a high Return on Sales and a low Asset Turnover.

Differentiator: Higher ROS, lower Asset Turnover

A company that sells cost-leading products with low margins and high unit volume would have a DuPont Chain with a low ROS and a high Asset Turnover.

Cost Leader: Lower ROS, higher Asset Turnover

The DuPont Chain component ratios are shown below:

Return On Sales (or Profitability) = Profit / Sales

Asset Turnover (or Turnover) = Sales / Assets

Leverage = Assets / Equity

Return on Equity = Profit / Equity