DuPont Analysis

What Is DuPont Analysis?

DuPont analysis describes a process which breaks down a company’s return on equity (ROE) into individual components:

  1. Net profit margin
  2. Asset turnover
  3. Financial leverage

This is especially useful to assess the underlying reasons for changes in a company’s ROE over time.

Three-Stage DuPont

ROE is calculated by dividing net income by shareholders’ equity. However, we can further break this down into the following three components:

  1. Net Profit Margin = Net Income / Net Sales
  2. Asset Turnover = Net Sales / Average Total Assets
  3. Financial Leverage = Average Total Assets / Average Shareholders’ Equity

Multiplying these ratios with each other cancels out net sales and average total assets, resulting again in net income / average shareholder’s equity, which is ROE.

Example DuPont Analysis: Thermo Fisher Scientific (TMO)

As an example, let’s look at Thermo Fisher Scientific (TMO). The company managed to increase ROE from 13% in 2019 to 20% in 2021 (an increase of 54%).

The question we can ask is: how did the company achieve this increase? Was it through an increase in net profit margin (i.e. higher sales compared to expenses), an increase in asset turnover, an increase in financial leverage, or a combination of the three factors?

Looking at the graphs below, we can see that between 2019 and 2021, Thermo’s net profit margin increased from 15% to 20% (a percentage increase of 33%). In the same time frame, asset turnover only changed from 0.44 to 0.48 (a 9% increase). In the same time frame, financial leverage changed from 2.0 to 2.2 (a 10% increase).

This shows us that the large increase in ROE was mainly achieved by an increase in net profit margin, and to a lesser degree due to asset turnover and financial leverage.

ROE, net profit margin, asset turnover, and financial leverage of Thermo Fisher Scientific between 2012 and 2021. Data source: Morningstar

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