ROE Tree

The ROE Tree is sometimes also referred to as the DuPont Tree, DuPont Method or DuPont Analysis, since it was developed by DuPont all the way back in the 1920s. Not exactly a new idea! But still very useful. There are a lot of variations on the theme: Some versions of the tree have three main branches (operating efficiency, asset efficiency, financial leverage), others use five main branches (see graphic). Similar trees also exist for ROI (Return on investment), Return on Capital Employed, etc.

The tree is an interesting tool to look at different businesses. Some industries such as grocery retailing work with low margins and limited leverage, and therefore ROE is largely driven by high asset turnover. Other industries such as financial services rely more on leverage, etc. DuPont used the tool to evaluate different businesses within the group.

The tree concept is an interesting tool to breaking down a number of different business metrics into their component parts: Increasing revenue is driven by increasing the number of customers and increasing their average spend. Increasing the average spend is driven by more units and/or a higher price. Increasing the price is driven by either a higher list price or lower discounts, etc.