Last Updated on December 3, 2020 at 3:48 pm
The 10th version of the freefincal automated stock analyzer includes an easy-to-understand graphical analysis of the factors that drive return on equity (ROE) using the five-step Dupont Analysis.
Return on equity is defined as
ROE = Net income/shareholders equity.
It is the profit for each unit of shareholders equity or the earning power of the company. If there is a gradual increase or decrease in ROE, it is beneficial to dig deeper and find out the reasons behind the trend.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Deconstructing the ROE into multiple factors helps us understand the factors that drive the ROE change. This was first done by DuPont explosives salesman Donaldson Brown in 1912 and hence the name Dupont formula.
In its modern form, the ROE is written as a product of five ratios.
Thus the ROE is the product of
- Financial leverage
- asset turnover
- operating margin
- interest burden
- tax burden.
1. The financial leverage is a measure of a companies debt. Higher the leverage, higher the borrowing and it could result in an increase in ROE! Therefore, if a fall in ROE is driven by a fall in financial leverage it is probably a good development.
2. Asset turnover is a measure of how well assets (including debt) are used to generate profit. An increase in ROE coupled with an increase in asset turnover is desirable. Decreasing asset turnover but steady/increasing revenue could imply the presence of unproductive assets.
3. Operating margin can be thought of as the profit left over after paying for production costs. A healthy operating margin is necessary to pay back debt. An increase in financial leverage should soon result in an increase in operating margin!
4. Interest burden represents the extent interest that has to be paid out to lenders. When financial leverage increases, interest burden will also increase.
5. Tax burden is a measure of the taxes that has to be paid. When interest burden increases, tax burden will usually decrease.
As with all financial ratios and balance sheet entries, these are heavily industry dependent.
Here is an example screenshot (click to enlarge) of the Dupont analysis page. The financial data is automatically downloaded from Morning Star.
The ROE has dropped significantly. The main ROE driver appears to be a fall in operating margin and net income. However, financial leverage has increased and therefore so has the interest burden.
The operating margin seems to have picked up last FY which is important considering the higher interest burden. While I do not know the reasons behind the fall, there are indications of a recent increase in profitability. Excuse me if this is not a very effective example for demonstrating ROE drivers, I am only a student. In any case, I had a wonderful time trying to understand about ROE drivers behind Colgate, Berger, Emami and other companies.
Other Features
The automated stock analysis sheet
- pulls financials from morningstar and analyzes them
- pulls adjusted stock price history from money control, and
- calculates intrinsic value six different ways!
It also pulls annual (standalone/consolidated) and quarterly financials from Value Research online.
Valuation models available:
1) Price Multiple Model
2) Sustainable Growth Rate
3) Book Value Growth Rate (Buffett’s approach to valuation)
4) Discounted Cash FlowOpens in a new windowOpens in a new window (DCF)
6) Graham formula and Graham number
7) Piotroski Score for the last 9 financial yearsOpens in a new window
8) Earnings Growth Estimate.
Download version 14th of the freefincal stock analyzer June 16th, 2019 <== latest!
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)