Some years back, the finance department at DuPont originated the "strategic profit formula." In some circles, this is called the "DuPont formula."
Return on equity = [profits/sales] x [sales/assets] x [assets/equity]
It is easy to see the links in this chain: profitability, productivity and capital structure.
These strategic business fundamentals that directly influence ROE are controlled or influenced by management. Management can influence or control these business fundamentals to maintain or increase ROE. Good managers work on each one.
When all three are strong and tight, ROE outcome is destined for success. If there is a "weakest link" (a business fundamental that is poor, failing, or declining), it can weaken the entire chain and hamper ROE indefinitely.
For each of these business fundamentals in the formula, we observe its value,
- in what direction it's going (trend) and
- how it compares to others in the industry.
