# 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.

$ROE = \frac{After-tax interest + Net Income}{Equity}$