DuPont analysis explained
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- čas přidán 30. 07. 2024
- DuPont equation tutorial. ROE: Return On Equity. ROA: Return On Assets. ROS: Return On Sales. This video takes you through the financial ratios of the ROE formula, the ROA formula, the ROS formula, asset turnover and leverage, and shows how they fit together. The very basics and the very essence of financial ratio analysis!
ROE or Return On Equity is defined as Net Income divided by Equity. In other words, the net profit that a company has generated during a year, divided by the book value of the shareholder capital invested in the company. ROE is a measure of the rate of return to shareholders.
⏱️TIMESTAMPS⏱️
00:00 ROE ROA ROS
00:20 Financial statements
00:39 ROE definition
02:03 DuPont analysis
03:18 ROA definition
04:05 Leverage
04:51 Extended DuPont equation
The 3-part version of the DuPont analysis shows you that ROE = ROS x asset turnover x leverage. The first two elements together, ROS multiplied by Asset Turnover, form ROA, Return On Assets. This ratio of ROA has many variations, some companies measure ROIC Return On Invested Capital, ROTC Return On Total Capital, ROCE Return On Capital Employed, or RONOA Return On Net Operating Assets. These are all variations on the same theme, you look at the returns (profit) generated during a period, and compared them to the capital invested in the company to generate those returns. ROA is an indicator of business success, influenced by two factors: ROS or margin performance, and asset turnover which you could call speed or velocity.
ROS or Return On Sales, is Net Income divided by Sales, which is an indicator of the relative profitability or operating efficiency: how many cents of profit are generated for every dollar of sales?
Asset Turnover is calculated as Sales divided by Assets, a measure of asset use efficiency.
The last element of the DuPont 3-part equation is leverage, Assets divided by Equity.
You can expand the DuPont formula to 5 steps, if you want even more analytical insight into the drivers of where your ROE increase or decrease is coming from. The two elements on the right stay the same: asset turnover and leverage. However, ROS gets split into three elements: Net Income divided by Earnings Before Tax, which is called tax burden, Earnings Before Tax divided by EBIT, called interest burden, and EBIT divided by sales, which is EBIT%. In a lot of companies, improving the EBIT% and increasing the Asset Turnover, are important targets for the management team, whereas the other elements are for the finance, treasury and tax departments to manage.
For an illustration of Return On Assets, my follow-up video analyzing ROA, ROS and asset turnover of Verizon and Walmart is highly recommended • Return On Assets example
Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: CZcams videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
Which insights can we gain from doing a DuPont analysis? This sequel focuses on how to apply a structured approach to interpreting the numbers: DuPont analysis interpretation czcams.com/video/A8Pprbx2uQ8/video.html
Posted 3 years ago and still holding its value today! Thank-you for all you do👍💯
My pleasure, Anthony! Thank you for watching and commenting. I have several videos on items within the DuPont equation for you in this playlist: czcams.com/video/DQgEoz8izxY/video.html
Now I realised finance and accounting is a language, with each day I become more fluent in it.
Agree! The more you play around with it, the more you understand, and the more you discover. :-)
You made me laugh out loud (in a good way) when you asked if we wanted "even more excitement" when hearing about the 5-STEP DuPont formula.
Thank you for the video. :)
:-) You're welcome, Julie! I personally enjoy the DuPont formula so much, that I've made multiple videos on the various aspects of it (even applying them to real life companies!) and compiled them in a playlist: czcams.com/video/2j8bfR8KqJ0/video.html
Clearest explanation of DuPont analysis technique that I have seen. Thank you. Now I understand
Thank you for the kind words. Glad you enjoyed it!
Here's a recent follow-up video applying DuPont analysis to Apple's 2017 numbers. czcams.com/video/DQgEoz8izxY/video.html
Great analysis - short and sweet. Thank you!
Oh my God. I had to take Advance Accounting last semester, and I swear these concepts were so hard for me. I am so glad I found your videos because there are concepts that I did not understand well, but you explained them really well.
Thanks🤗🤗🤗🤗
Glad it was helpful! Some more examples and discussion in this playlist: czcams.com/video/W5CrcMSBARU/video.html&pp=gAQBiAQB
Thank you for recommending me this playlist!
Happy to help! I am actually working on another real-world DuPont analysis example right now, should get published soon.
Awsome video!. Finally got to understand the Dupont analysis in an easy and enjoyabe way.....thank you very much Finance Storyteller.
You're welcome! Thanks for your support, Carlos! I think you will enjoy this video applying DuPont analysis to Apple's financial statements as well: czcams.com/video/DQgEoz8izxY/video.html
Brilliant vid, thanks man!!!!
You're welcome! Good to hear you liked it.
Thank you very much, Professor.
Happy to help! Have a look at the related videos in this playlist as well where I dive into the various elements of ROE and apply it to real world companies: czcams.com/video/2j8bfR8KqJ0/video.html
Amazing and easy explanation, thank you !!
Happy to hear that, Ali! More examples of how to apply it to real world companies in this playlist: czcams.com/video/bhbDDSohJ84/video.html
Great video mate - thanks
Thank you, James! I have made a follow-up video to illustrate the Return On Assets formula with numbers, hope you like that one as well! czcams.com/video/2j8bfR8KqJ0/video.html
This was amaaaazing. Good job
Thank you! Very happy to hear that. I have a few more examples of the various elements of the DuPont analysis on my channel, like this ROA example czcams.com/video/2j8bfR8KqJ0/video.html and a discussion of financial leverage czcams.com/video/GESzfA9odgE/video.html Enjoy!
Amazing explanation!
Thank you! Here's the companion video applying the DuPont analysis to Apple's financial statements: czcams.com/video/DQgEoz8izxY/video.html
Thanks for this video!
You're welcome!
very clear - thank you
You´re welcome! Here´s a follow-up video applying DuPont analysis to Apple Inc's 2017 financial statements: czcams.com/video/DQgEoz8izxY/video.html
Thank for you this.. I have my exams today and It'll be helpful for me
Wishing you lots of success in the exams!
excellent-thank you!
Glad it was helpful! Here's a playlist with some definitions of related ratios and some examples: czcams.com/video/W5CrcMSBARU/video.html
NIce video, thanks
This channel saved me from dying because of my Security Analysis assignment.
Happy to help! More good stuff (examples, other ratios) in this playlist: czcams.com/video/2j8bfR8KqJ0/video.html&pp=gAQBiAQB
Real good one , thank you
Happy to hear that!!!
Great explanation 5hank you
You're welcome! I have a few illustrations of the concepts in the following DuPont analysis playlist: czcams.com/video/bhbDDSohJ84/video.html
Excellent explanation.
Thank you, Kevin!
thanks for the great video
You're welcome! I often use ROE analysis when taking a first look at a company, it gives you a feeling for the big picture.
Thank you so much..the vid saved me from a disaster in the exam :D
You're welcome! Happy to help.
Hey, good to see someone from Bangladesh! from which University are you?
Perfect 👌 explanation..
Thank you, Rakesh! :-) Here's a video showing how to apply it to a company's actual financial results: czcams.com/video/DQgEoz8izxY/video.html
Thanks sir.
Thank you for sharing
Thanks for watching! 😉
Thank-you Sir! I really appreciate the detail and I also got the trivia question right!
You're welcome, Joslyn! I really like the topic, and have made a few more videos with examples or more in depth discussion of parts of the DuPont equation. Here are two suggestions of follow-up videos to watch: a real-life example of calculating and comparing Return On Assets czcams.com/video/2j8bfR8KqJ0/video.html and a video covering financial leverage czcams.com/video/GESzfA9odgE/video.html
You are a savior! The name Finance Storyteller suits you well!
Happy to help, Claudia! I have made some follow-up videos with examples of ROE, ROA, leverage, etc. that might be helpful for you as well: czcams.com/video/2j8bfR8KqJ0/video.html
Thank you so much.
You're welcome!
I get it now, thank you
You're welcome! Happy to hear that. More examples in this playlist: czcams.com/video/bhbDDSohJ84/video.html
thank you!
You're welcome! :-)
Totally makes sense
Thank you very much! :-)
Clear explanation. Revising for financial analysis exam and you are making my nights easier. Btw are you from Holland ? Accent sounds familiar. Thank you ! :D
Thank you, Elio! Yes, you guessed right on the accent. :-) Please spread the word!
It's easy to understand.
Thank you! Good to hear. I have made a follow-up video with numbers to illustrate Return On Assets, see czcams.com/video/2j8bfR8KqJ0/video.html
love!
Thanks!
Hey, may I please know why the formula, Assets / equity, is used for financial leverage instead of Debt / Equity
Good question! The reason for that is that the core calculation is Return On Equity (ROE) = Net Income / Equity. The beauty of the DuPont equation in its 3-step or its 5-step version is that the final outcome of the calculation is the same as ROE. Net Income / Sales times Sales / Assets times Assets / Equity equals Net Income / Equity as both Sales and Assets are in the numerator once and in the denominator once and therefore "cancelled out" in total. Does that make sense?
@@TheFinanceStoryteller ohhh. Yea that makes sense. Thank you so much for the quick and concise reply!!! This is why I love your channel so much!
You're welcome! Please subscribe, and spread the word to friends and colleagues. :-)
Thank you for such informative Video...could you please make a video on Growth Ratio ie ROE x RR
Thanks for the kind words and the suggestion. Let me see if there's a story in there....
I learn there's slightly different when i learned about roa and roe. In the formula that i learned it used average total asset and average shareholder's equity. But it is different in this video. Can someone explain to me because I'm confuse.
Using average assets and average equity is even more sophisticated than what I explain here. Next step is to take a 5-point average (start of the year, plus 4 quarter-ends) to get even more detailed. It doesn't change the concept itself though....
@@TheFinanceStoryteller I see. Thank you for explaining
I am here to watch all video
Welcome, Sidiki! CZcams is open 24/7, so you're welcome to visit anytime!
hello, how do you identify if your dupont is high or low?
Hello Paolo! Take a look at my case studies calculating ROA and ROE for real world companies, and you will get a feel for it:
czcams.com/video/2j8bfR8KqJ0/video.html
czcams.com/video/DQgEoz8izxY/video.html
I smell Dutch. Great video btw
Jazeker! 😎🇳🇱 Nog meer nuttige video's met o.a. voorbeelden van hoe je ROA vergelijkingen tussen bedrijven doet in deze afspeellijst: czcams.com/video/2j8bfR8KqJ0/video.html&pp=gAQBiAQB
thanks
You're welcome!
Why do most companies have a financial leverage in roe formula?
Hello Edward! Interest rates are very low, so debt/borrowing is a very cheap source of financing. The higher the financial leverage, the higher the ROE can become, but at the same time the higher the risk of bankruptcy if the company for whatever reason gets into some turbulence.... See also my video on financial leverage for a numerical example: czcams.com/video/GESzfA9odgE/video.html
I wish I had you as a teacher
Thanks for the compliment, Elie! I have some related videos for you dealing with specific aspects of the DuPont equation and how to apply it to real life companies: czcams.com/video/2j8bfR8KqJ0/video.html
.... and it's a pleasure to have you as an online student on my CZcams channel! 😎
@@TheFinanceStoryteller Thank you so much ! I could not find anything on the alternative approach, let me know if you have anything ! I'd sure would want to watch it ! :)
So how is ROE affected by the various factors
Hello Michael! I have recently made a follow-up video zooming in on the financial leverage aspect of the DuPont analysis ROE formula: czcams.com/video/GESzfA9odgE/video.html
Both my ROE explained video czcams.com/video/6fA5N4giHrM/video.html and my ROA explained video czcams.com/video/W5CrcMSBARU/video.html have some practical examples of improving ROE. Let me know if these answer your question!
are you ready for more excitement
Wait till you see my example of how to calculate ROA (which is a subset of ROE): czcams.com/video/2j8bfR8KqJ0/video.html
There's hindi sub too
Not to be confused with the DuPont approach that Royce DuPont devised for a 1000% ROI
Had never heard of Royce DuPont before, but yes, that is a different topic/person altogether.
@TheFinanceStoryteller wait you're not a DuPont disciple?
Have you seen Dark Water?
No, I haven't. Would you recommend it?
The Finance Storyteller *highly recommended* it’s all based on DuPont as well. Will give your whole video a new light!
am an Engineer, doing Accounting now in one of my modules. Let me take off my jacket
Welcome! Be aware that accounting is an art as well as a science. Context and interpretation are very important. I have met many engineers that struggle with that. If I may suggest, have a look at a few of the videos in my Accounting 101 playlist czcams.com/video/b93KBmcXanI/video.html&pp=gAQB , that should get you off to a good start! Feel free to ask questions in the comment section of any of the videos! Happy to help.
1920
Correct!
I don't think you explained how to apply the formula
Here's an example using real world numbers: czcams.com/video/DQgEoz8izxY/video.html
I hate that guy from the Dupont corporation because now I have to learn this in one of my grad classes and it looks like a behemoth of an equation, the mother of all finance equations I have learned up until this point.
Take it easy.... If you want to start understanding how a company is performing financially, then the DuPont equation is a nice tool. And you don't even have to pay a licence fee to use it. If you are not interested in learning how to perform financial analysis, then don't take the class.
@@TheFinanceStoryteller Just stressed out...
I got you covered, here is a playlist with some examples of how to apply the ROE DuPont equation, you will ace that class!!!! Hope these are easier to follow than most textbooks. czcams.com/video/W5CrcMSBARU/video.html