DuPont Analysis (04/11/2014)
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Andrew Legget
:
I have used the DuPont analysis on occasion as well as a version which break ROE down even further down to the micro level by dissagregarting the drivers of return on net operating assets and financial leverage.
As always, just calculating a ratio doesn’t necessarily explain anything unless you compare with other data. I think D/E is a useless ratio for instance unless you compare with interest coverage. The same goes for ROE, a company may have high ROE but looking under the hood you may find that it isn’t necessarilly indicative of what you would like in a quality company. In fact performance may have been decreasing with financial leverage making up the difference or improvement. If this is the case then the performance can only decline so much more before the finacnial leverage section becomes a problem.
One of the many ways you can get a better picture of what is happening to a company.