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 http://eepurl.com/dIaa5z — SUPPORT EDSPIRA ON PATREON *  / prof_mclaughlin   — GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT https://edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST Apple Podcasts: https://podcasts.apple.com/us/podcast... Spotify: https://open.spotify.com/show/4WaNTqV... Website: https://www.edspira.com/podcast-2/ — GET TAX TIPS ON TIKTOK   / prof_mclaughlin   — ACCESS INDEX OF VIDEOS https://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 https://www.edspira.com/about/ https://michaelmclaughlin.com