## 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 Then multiplying by assets and sales, like this Some shuffling and we can get the three items listed above 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. 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...

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