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Position · Diagnose

DuPont decomposition

Splits the return the business currently earns into margin, asset turnover and leverage, so the conversation afterwards is about the right one.

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Stage
01 Diagnose
Works at
Corporate, Business
Maturity
Established SME → Large organisation
Time
Half a day, once filed accounts are to hand

What it is

A standard financial decomposition that splits a return measure into three multiplicative components — net margin, asset turnover and financial leverage — so a single return-on-equity number stops hiding three different, independently manageable causes.

Net profit margin
Profit as a share of revenue. A margin problem means pricing, cost, or mix — and is fixed inside the operating business.
Asset turnover
Revenue generated per pound of assets employed. A turnover problem means the business is capital-heavy for the revenue it produces — assets sitting idle, or too much working capital tied up.
Financial leverage
Assets financed per pound of equity. A leverage-driven return can look identical to a genuinely improving business while actually just meaning more debt, which is a very different story to tell a board.
The multiplication
The three components multiply to the overall return, which is what makes the split honest: nothing is left over, and every point of return is accounted for by exactly one of the three.
Trend over comparison
The decomposition is most useful run across several years for the same business and against genuine comparators, because a single year's split says less than which component is moving and why.
The mistake people makeReading a single year's return without decomposing it, or decomposing it once and stopping — the value is in which component is moving over time, and against comparators, not in one snapshot.
What it’s forYou need the first hour of a financial diagnostic and want to know whether a returns problem is a margin problem, an asset-efficiency problem or a leverage problem before analysing further.
What it’s not forThe business does not yet have a settled set of accounts to decompose, or the question is about a single unit's economics rather than the whole business's return.

How you run it

  1. Pull two to three years of accountsA single year decomposes but does not show a trend, and the trend is most of what this tool is for.
  2. Calculate the three components for each yearNet margin, asset turnover, and leverage. Check they multiply back to the reported return — if they do not, a figure is wrong.
  3. Identify which component is actually movingMargin, turnover and leverage rarely move together. Name the one driving the change in overall return.
  4. Pull the same three components for two or three comparatorsA return that looks strong in isolation can be entirely explained by leverage a comparator is not carrying.
  5. Write the narrower question the result points toA margin problem sends the analysis to pricing and cost; a turnover problem to asset efficiency; a leverage problem to the balance sheet. Say which.

The prompt

Two ways to run it

Run this tool in your own Claude

The short prompt starts your partner against the library on your disk. The long one carries everything with it and needs nothing installed.

🔒 Prompt locked

Everything above is free — what this tool is, what it is for, what it is not for, and how to run it as a workshop. Three tool prompts a month are free with an account; beyond three, and for the printable canvas, it is the paid part.

See plans — from £19 a month

Your playbook

It lands in the earliest stage this tool suits. Move it on the Playbook page.

You’ll need

  • Filed or management accounts covering at least two to three years
  • The same figures for two or three genuine comparators, where available
  • Clarity on which return measure matters for this question — equity or assets

You’ll end up with

  • Return on equity or assets split into its three components
  • Which component is actually driving the change in return over time
  • A specific, narrower question for whichever half of the bank the result points to

Runs well with

AI risk classification and governanceAnalysis planBusiness Model CanvasComparable company benchmark