DuPont Analysis for Microsoft and Google

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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%