DuPont Analysis for ROA | Financial Statement Analysis

ROA (return on assets) is a very helpful metric because it allows you to compare the profitability of two companies while controlling for firm size. To understand why a company's ROA is rising or falling, or why one company's ROA is higher than another company's ROA, we can apply DuPont analysis.
DuPont analysis expresses ROA as the product of two components: profit margin and asset turnover. Thus, we have the following equation:
ROA = profit margin * asset turnover
If you see that Company A has a higher ROA than Company B, you can disaggregate ROA to see whether Company A has a higher profit margin, a higher asset turnover, or both a higher profit margin and a higher asset turnover. A higher profit margin means the company manages its expenses better (or sells its products at a higher markup) whereas a higher asset turnover means the company is more efficient at using its assets to generate sales.
-
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.
-
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44-PAGE GUIDE TO U.S. TAXATION
• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES AND SPREADSHEETS
* eepurl.com/dIaa5z
-
SUPPORT EDSPIRA ON PATREON
* / prof_mclaughlin
-
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
* edspira.thinkific.com
-
LISTEN TO THE SCHEME PODCAST
* Apple Podcasts: podcasts.apple.com/us/podcast...
* Spotify: open.spotify.com/show/4WaNTqV...
* Website: www.edspira.com/podcast-2/
-
GET TAX TIPS ON TIKTOK
* / prof_mclaughlin
-
ACCESS INDEX OF VIDEOS
* www.edspira.com/index
-
CONNECT WITH EDSPIRA
* Facebook: / edspira
* Instagram: / edspiradotcom
* LinkedIn: / edspira
-
CONNECT WITH MICHAEL
* Twitter: / prof_mclaughlin
* LinkedIn: / prof-michael-mclaughlin
-
ABOUT EDSPIRA AND ITS CREATOR
* www.edspira.com/about/
* michaelmclaughlin.com

[@ishandhingra29]

Till now every teacher told me How ROA is done now I know Why ROA is done. Thanks Man! Much Respect.

[@Edspira]

😀

[@sarahnourya6110]

This video is criminally underrated! I can't thank you enough!!!!

[@amirhamzah1976]

Informative

[@Edspira]

Thanks!

[@user-tf4jh6fo2s]

I'm studying for my exam, Thanks

[@NL-tq1yr]

Isnt dupont analysis about ROE and not Roa? You just multiply what you saw in this video by the leverage (assets/equity).

[@ishandhingra29]

We have DuPont analysis for both.

[@Edspira]

You can do it for ROA or ROE. This video disaggregates ROA but I also have a video with a 3-step decomposition of ROE and a video with a 5-step decomposition of ROE.