DuPont Analysis for ROA | Financial Statement Analysis

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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.
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