Those who think equity markets are heading back to the glory days might want to ponder returns on equity. This is a simple and delightfully pure measure of what a company can generate from shareholder funds. One way to explore which way ROEs might be heading is to break the ratio down into more manageable chunks.

The so-called Du Pont model does this. It shows that ROE can be calculated by multiplying a company’s net margin by its asset turnover and its leverage. An idea about what might happen to each of these ratios can help investors to gauge the direction in which ROEs are headed.