# DuPont Analysis for Microsoft and Google

Jun 01

Return on Assets (ROA) and Return on Equity (ROE) are two standard measures used to evaluate the health and future prospects of a company. This type of analysis was introduced in the 1920s, being employed by the DuPont corporation. It algebraically splits ROE into three different measures

• Profit margin
• Turnover
• Leverage

This is accomplished by starting with the ratio of net income to equity $ROE = \frac{Net Income}{Equity}$

Then multiplying by assets and sales, like this $ROE = \frac{Net Income}{Equity} \times \frac{Assets}{Assets} \times \frac{Sales}{Sales}$

Some shuffling and we can get the three items listed above $ROE = \frac{Net Income}{Sales} \times \frac{Sales}{Assets} \times \frac{Assets}{Equity}$

### Variation

Some authors prefer to normalize out taxes and interest in the ROA and ROE equations, so that in place of net income they instead use after-tax interest plus net income. $ROE = \frac{After-tax interest + Net Income}{Equity}$

## DuPont Analysis for Google

 Assets 96,692.00 Equity 75,473.00 Net income 11,193.00 Interest Expense 85.00 Tax rate 16.58% After-tax interest 70.91 After-tax interest + Net Income 11,263.91 ROA 11.6% ROE 14.9% DuPont Sales 53,499 profit margin 21.1% turnover 55.3% leverage 128.1%

## DuPont Analysis for Microsoft

 Assets 134,105.00 Equity 76,688.00 Net income 16,406.00 Interest Expense 405.00 Tax rate 22.85% After-tax interest 312.46 After-tax interest + Net Income 16,718.46 ROA 12.5% ROE 21.8% DuPont Sales 76,012.00 profit margin 22.0% turnover 56.7% leverage 174.9%

## Observations

Profit margin and turnover are roughly the same for both companies. However, Microsofts total Assets are greater than Google’s by about 40%. That significantly increases Microsoft’s leverage position. The higher ratio for leverage may shed some light on my previous analysis showing that Microsoft has a higher bond rating and a higher debt load to bonds.

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