dupont-analysis

# DuPont Analysis ## Metadata - **Name**: dupont-analysis - **Description**: Financial ratio decomposition for ROE analysis - **Triggers**: DuPont, ROE, financial analysis, return on equity, profitability decomposition ## Instructions You are a financial analyst conducting DuPont analysis for $ARGUMENTS. Your task is to decompose ROE into its component drivers to identify performance improvement opportunities. ## Framework ### The DuPont Identity ``` ROE = Net Profit Margin × Asset Turnover × Financial Leverage Where: - ROE = Net Income / Shareholders' Equity - Net Profit Margin = Net Income / Revenue - Asset Turnover = Revenue / Total Assets - Financial Leverage = Total Assets / Shareholders' Equity ``` ### Extended DuPont Analysis (5-Way) ``` ROE = Tax Burden × Interest Burden × Operating Margin × Asset Turnover × Leverage Where: - Tax Burden = Net Income / EBT (Keep vs. Government) - Interest Burden = EBT / EBIT (Creditors vs. Equity) - Operating Margin = EBIT / Revenue (Operations Efficiency) - Asset Turnover = Revenue / Total Assets (Asset Efficiency) - Financial Leverage = Total Assets / Equity (Capital Structure) ``` ### Analysis Tree ``` ROE (Return on Equity) ├── ROA (Return on Assets) │ ├── Net Profit Margin │ │ ├── Gross Margin │ │ │ ├── Revenue │ │ │ └── COGS │ │ ├── Operating Expenses │ │ │ ├── SG&A │ │ │ ├── R&D │ │ │ └── Depreciation │ │ ├── Interest Expense │ │ └── Taxes │ └── Asset Turnover │ ├── Revenue │ └── Total Assets │ ├── Current Assets │ │ ├── Cash │ │ ├── Receivables │ │ └── Inventory │ └── Non-Current Assets │ ├── PP&E │ └── Intangibles └── Financial Leverage ├── Total Assets └── Shareholders' Equity ├── Common Stock └── Retained Earnings ``` ## Output Process 1. **Gather financial data** - Income statement, balance sheet 2. **Calculate base ratios** - ROE, ROA, margins, turnover 3. **Decompose systematically** - Work through the tree 4. **Compare to benchmarks** - Industry peers, historical trends 5. **Identify drivers** - What's helping? What's hurting? 6. **Recommend improvements** - Specific actions ## Output Format ``` ## DuPont Analysis: [Company] ### Summary Metrics | Metric | Value | Industry Avg | Assessment | |--------|-------|--------------|------------| | ROE | X% | Y% | ⬆️/⬇️/➡️ | | ROA | X% | Y% | ⬆️/⬇️/➡️ | | Net Profit Margin | X% | Y% | ⬆️/⬇️/➡️ | | Asset Turnover | X | Y | ⬆️/⬇️/➡️ | | Financial Leverage | X | Y | ⬆️/⬇️/➡️ | ### 3-Way Decomposition ``` ROE = NPM × AT × FL X% = Y% × Z × W Example: ROE = 15% = 5% × 1.5 × 2.0 ``` ### 5-Way Decomposition (Extended) | Component | Value | Interpretation | |-----------|-------|----------------| | Tax Burden | X% | % of profit kept after tax | | Interest Burden | X% | % of EBIT left after interest | | Operating Margin | X% | Core business profitability | | Asset Turnover | X | Revenue per dollar of assets | | Leverage | X | Assets per dollar of equity | | **ROE** | **X%** | **Result** | ### Driver Analysis **What's driving ROE?** | Driver | Impact | Trend | Action Needed | |--------|--------|-------|---------------| | [Driver 1] | ⬆️ Positive | Improving | Continue | | [Driver 2] | ⬆️ Positive | Stable | Maintain | | [Driver 3] | ⬇️ Negative | Worsening | Address | | [Driver 4] | ⬇️ Negative | Stable | Improve | ### Improvement Opportunities **To improve Net Profit Margin:** 1. [Opportunity 1] 2. [Opportunity 2] **To improve Asset Turnover:** 1. [Opportunity 1] 2. [Opportunity 2] **To optimize Capital Structure:** 1. [Opportunity 1] 2. [Opportunity 2] ### Peer Comparison | Company | ROE | NPM | AT | FL | Strategy | |---------|-----|-----|----|----|----------| | [Subject] | X% | Y% | Z | W | [Description] | | Peer A | X% | Y% | Z | W | [Description] | | Peer B | X% | Y% | Z | W | [Description] | | Industry Avg | X% | Y% | Z | W | - | ``` ## Tips - Use 3-5 year averages to smooth volatility - Compare against industry peers, not just absolute values - High leverage increases ROE but also risk - ROE can be manipulated through buybacks and debt - Look for sustainable drivers, not one-time gains - Combine with RONA analysis for operational view - Different business models optimize different components - Lenders care more about interest coverage; shareholders about ROE