What is Extended DuPont Analysis?
The extended (five-step) DuPont analysis breaks return on equity into five drivers: tax burden, interest burden, operating margin, asset turnover, and equity multiplier. It pinpoints exactly which lever explains a change in ROE between periods or between companies.
How It Works
- ROE = (Net income / Pre-tax income) × (Pre-tax income / EBIT) × (EBIT / Sales) × (Sales / Assets) × (Assets / Equity)
- Each ratio isolates a different dimension: tax efficiency, financing cost, operating efficiency, asset use, leverage
- Identifies whether ROE improvement is driven by real operating gains or just by more debt
- Used in equity research, internal performance reviews, and credit analysis
- More informative than the three-step DuPont when interest and tax effects are material
Saudi Context
Saudi banks and large industrials publish enough detail in their CMA-filed statements to run an extended DuPont analysis. It is the standard tool used by Saudi-licensed financial analysts to compare bank performance across cycles.
Example
A Saudi bank’s ROE rises from 11% to 14% year over year. Extended DuPont shows the operating margin held steady, asset turnover improved 5%, and the equity multiplier rose 20% (more leverage). The conclusion: most of the ROE jump came from leverage, not real operating improvement.