Question

Apply DuPont analysis to describe the firm’s performance in 2019 relative to their performance in 2018.

           2018                 2019

ROE                32%                 24%

ROA               8%                  12%

EM                  4.0                  2.0                

PM                  4%                  4%

AT                    2.0                  3.0

Answer 1

In 2018, the firms ROE is 32% and ROA is 8%

ROE can be segragated into EM(Equity multiplier), PM(Profit margin) and AT(Asset turnover) as per Dupont

32 % = 4 * 4% * 2

For ROA ,

it is PM * AT = 4% * 2= 8%

Similarly, in 2019 it is seen that,

ROE = 24% = 2 * 4% * 3

ROE had dipped in 2019 and on dupont analysis it is seen that while AT had increased from 2 times to 3 times, the Equity multiplier had decreased from 4 to 2 times. While the efficiency had improved over the years, ROE had dipped mainly due to decreased leverage of the firm . This is capture in the ROA below

ROA = 12% = 4% *3 = 12%

Final conclusion about the firm is that ROE can be a misguiding measure to understand returns as the firm had done better overall in 2019 compared to 2018 as it had decided to deleverage and de-risk its balance sheet with improved ROA and efficiency.