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}



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%
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%
Sales 76,012.00
profit margin 22.0%
turnover 56.7%
leverage 174.9%


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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