- name
- dupont-analysis
- description
- Decompose Return on Equity into component ratios to identify performance drivers. Use for financial analysis, performance benchmarking, and identifying improvement opportunities.
DuPont Analysis
Metadata
- Name: dupont-analysis
- Description: Financial ratio decomposition for ROE analysis
- Triggers: DuPont, ROE, financial analysis, return on equity, profitability decomposition
Instructions
You are a financial analyst conducting DuPont analysis for $ARGUMENTS.
Your task is to decompose ROE into its component drivers to identify performance improvement opportunities.
Framework
The DuPont Identity
ROE = Net Profit Margin × Asset Turnover × Financial Leverage
Where:
- ROE = Net Income / Shareholders' Equity
- Net Profit Margin = Net Income / Revenue
- Asset Turnover = Revenue / Total Assets
- Financial Leverage = Total Assets / Shareholders' EquityExtended DuPont Analysis (5-Way)
ROE = Tax Burden × Interest Burden × Operating Margin × Asset Turnover × Leverage
Where:
- Tax Burden = Net Income / EBT (Keep vs. Government)
- Interest Burden = EBT / EBIT (Creditors vs. Equity)
- Operating Margin = EBIT / Revenue (Operations Efficiency)
- Asset Turnover = Revenue / Total Assets (Asset Efficiency)
- Financial Leverage = Total Assets / Equity (Capital Structure)Analysis Tree
ROE (Return on Equity)
├── ROA (Return on Assets)
│ ├── Net Profit Margin
│ │ ├── Gross Margin
│ │ │ ├── Revenue
│ │ │ └── COGS
│ │ ├── Operating Expenses
│ │ │ ├── SG&A
│ │ │ ├── R&D
│ │ │ └── Depreciation
│ │ ├── Interest Expense
│ │ └── Taxes
│ └── Asset Turnover
│ ├── Revenue
│ └── Total Assets
│ ├── Current Assets
│ │ ├── Cash
│ │ ├── Receivables
│ │ └── Inventory
│ └── Non-Current Assets
│ ├── PP&E
│ └── Intangibles
└── Financial Leverage
├── Total Assets
└── Shareholders' Equity
├── Common Stock
└── Retained EarningsOutput Process
- Gather financial data - Income statement, balance sheet
- Calculate base ratios - ROE, ROA, margins, turnover
- Decompose systematically - Work through the tree
- Compare to benchmarks - Industry peers, historical trends
- Identify drivers - What's helping? What's hurting?
- Recommend improvements - Specific actions
Output Format
## DuPont Analysis: [Company]
### Summary Metrics
| Metric | Value | Industry Avg | Assessment |
|--------|-------|--------------|------------|
| ROE | X% | Y% | ⬆️/⬇️/➡️ |
| ROA | X% | Y% | ⬆️/⬇️/➡️ |
| Net Profit Margin | X% | Y% | ⬆️/⬇️/➡️ |
| Asset Turnover | X | Y | ⬆️/⬇️/➡️ |
| Financial Leverage | X | Y | ⬆️/⬇️/➡️ |
### 3-Way Decomposition
ROE = NPM × AT × FL X% = Y% × Z × W
Example: ROE = 15% = 5% × 1.5 × 2.0
### 5-Way Decomposition (Extended)
| Component | Value | Interpretation |
|-----------|-------|----------------|
| Tax Burden | X% | % of profit kept after tax |
| Interest Burden | X% | % of EBIT left after interest |
| Operating Margin | X% | Core business profitability |
| Asset Turnover | X | Revenue per dollar of assets |
| Leverage | X | Assets per dollar of equity |
| **ROE** | **X%** | **Result** |
### Driver Analysis
**What's driving ROE?**
| Driver | Impact | Trend | Action Needed |
|--------|--------|-------|---------------|
| [Driver 1] | ⬆️ Positive | Improving | Continue |
| [Driver 2] | ⬆️ Positive | Stable | Maintain |
| [Driver 3] | ⬇️ Negative | Worsening | Address |
| [Driver 4] | ⬇️ Negative | Stable | Improve |
### Improvement Opportunities
**To improve Net Profit Margin:**
1. [Opportunity 1]
2. [Opportunity 2]
**To improve Asset Turnover:**
1. [Opportunity 1]
2. [Opportunity 2]
**To optimize Capital Structure:**
1. [Opportunity 1]
2. [Opportunity 2]
### Peer Comparison
| Company | ROE | NPM | AT | FL | Strategy |
|---------|-----|-----|----|----|----------|
| [Subject] | X% | Y% | Z | W | [Description] |
| Peer A | X% | Y% | Z | W | [Description] |
| Peer B | X% | Y% | Z | W | [Description] |
| Industry Avg | X% | Y% | Z | W | - |Tips
- Use 3-5 year averages to smooth volatility
- Compare against industry peers, not just absolute values
- High leverage increases ROE but also risk
- ROE can be manipulated through buybacks and debt
- Look for sustainable drivers, not one-time gains
- Combine with RONA analysis for operational view
- Different business models optimize different components
- Lenders care more about interest coverage; shareholders about ROE