By Dan Dzombak, The Motley Fool Posted | 2:08PM 01/14/12

As investors, we need to understand how our companies truly make their money. A neat trick developed for just that purpose -- the DuPont Formula -- can help us do so.

So in this series we let the DuPont do the work. Let's see what the formula can tell us about Silver Wheaton (NYS: SLW) and a few of its peers.

The DuPont Formula can give you a better grasp on exactly where your company is producing its profit, and where it might have a competitive advantage. Named after the company where it was pioneered, the formula breaks down return on equity into three components:

Return on equity = net margin x asset turnover x leverage ratio

What makes each of these components important?Generally, the higher these numbers, the better. That said, too much debt can sink a company, so beware of companies with very high leverage ratios.

- High net margins show that a company can get customers to pay more for its products. Luxury-goods companies provide a great example here.
- High asset turnover indicates that a company needs to invest less of its capital, since it uses its assets more efficiently to generate sales. Service industries, for instance, often lack big capital investments.
- Finally, the leverage ratio shows how much the company is relying on liabilities to create its profits.

So what does DuPont say about these four companies?

Company Return on Equity Net Margin Asset Turnover Leverage Ratio Silver Wheaton 26.9% 88.1% 0.27 1.14 Yamana Gold (NYS: AUY) 7.9% 26.6% 0.21 1.42 Agnico-Eagle Mines (NYS: AEM) 3.3% 6.7% 0.33 1.51 Goldcorp (NYS: GG) 9.4% 29.8% 0.20 1.38

Silver Wheaton's return on equity is head and shoulders above its industry peers. It manages to do so largely because of its high net margins, which are nearly 3 times as high as the next highest in that category. Its asset turnover, on the other hand, is comparable with its industry peers, and it has the lowest leverage ratio of the listed companies...

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