Hi jimmy, great video! But I do have a question, why did you use the Average Asset at the end of the video instead of the Total asset to calculate the Total Asset Turnover Rate and the Financial Leverage?
That's a good question. I probably should have been clearer about that. So it is total assets were using. But it's also the average because we take the total assets at the start of the year and the total assets at the end of the year and averaging them out. And that crucial because we're comparing that number to the revenue which comes from the income statement. And we just remember that the income statement represents the business activity throughout the year, while the balance sheet represents one specific day (the last day of the year). To compensate for this we take the average of balance sheet numbers to try to get it as close as possible to representing the whole year (like the income statement does). Hopefully that clarifies it a bit
Learn to Invest ahh that makes sense, I thought it might have been the same concept as why we used average equity, but I wasn’t sure. Thank you very much for the clarification!
Greetings from India ! I am immensely impressed with the crisp and precise presentation on RoE. Moreover, I have immediately begun applying the knowledge into my financial analysis. Thanks for your time and efforts to educate us
I've had never even heard of DuPont Analysis. This is a really smart way of looking at the numbers. I'm going to do this for some of my holdings. Thanks so much! I love this channel, Keep it up, you're going to be huge.
I love the math analysis. It's less ambiguous and easier to compare, but I also appreciate the dangers in numbers and how they only tell a portion of the story.
So, Basically Du Pont realized that ROE was easy to manipulate via leverage. A company could leverage like crazy and inflate ROE so they decomposed ROE. The first iteration is usually called the Three Factor ROE and it says like: Ok, ROE can grow via three things: 1. Improving profitability = Greater Net profit margin: THAT IS GOOD!. 2. Improving operative efficiency = Greater asset turnover: THAT IS ALSO GOOD! 3. Improving leverage = More debt = Riskier capital structure: NOT GOOD! They then developed the 5 factor ROE that includes The same three previous variables but introduces the "Burdens" and there you can finally see what is the deal with leverage: Leverage growth increases ROE, but also increases Interest burden, which impacts ROE negatively. So Leverage is in the end a double edge sword for ROE and not a very desirable way to improve the metric.
Great video, im loving them all. Just one question. You've said that more debt shortens Equity on Financial Leverage. I think that's not true. ROE rises on financial leverage because average Assets goes up when u contract debt. It's a matter of proportion.
What do you think of the Dupont Analysis Method, Do you ever use it?
Hi jimmy, great video! But I do have a question, why did you use the Average Asset at the end of the video instead of the Total asset to calculate the Total Asset Turnover Rate and the Financial Leverage?
That's a good question. I probably should have been clearer about that. So it is total assets were using. But it's also the average because we take the total assets at the start of the year and the total assets at the end of the year and averaging them out. And that crucial because we're comparing that number to the revenue which comes from the income statement.
And we just remember that the income statement represents the business activity throughout the year, while the balance sheet represents one specific day (the last day of the year). To compensate for this we take the average of balance sheet numbers to try to get it as close as possible to representing the whole year (like the income statement does). Hopefully that clarifies it a bit
Learn to Invest ahh that makes sense, I thought it might have been the same concept as why we used average equity, but I wasn’t sure. Thank you very much for the clarification!
That was THE best explanation of The DuPont Analysis I have come across. Well done!
Thanks!
Agreed! And the explanation is timeless, helping out this grad student 4 years later :)
This is the best video on DuPont! Thank you!
Greetings from India ! I am immensely impressed with the crisp and precise presentation on RoE. Moreover, I have immediately begun applying the knowledge into my financial analysis. Thanks for your time and efforts to educate us
I've had never even heard of DuPont Analysis. This is a really smart way of looking at the numbers. I'm going to do this for some of my holdings. Thanks so much! I love this channel, Keep it up, you're going to be huge.
Finally, a video that explains what you use Dupont analysis for!!!! Thanks
I love the math analysis. It's less ambiguous and easier to compare, but I also appreciate the dangers in numbers and how they only tell a portion of the story.
So, Basically Du Pont realized that ROE was easy to manipulate via leverage. A company could leverage like crazy and inflate ROE so they decomposed ROE. The first iteration is usually called the Three Factor ROE and it says like: Ok, ROE can grow via three things:
1. Improving profitability = Greater Net profit margin: THAT IS GOOD!.
2. Improving operative efficiency = Greater asset turnover: THAT IS ALSO GOOD!
3. Improving leverage = More debt = Riskier capital structure: NOT GOOD!
They then developed the 5 factor ROE that includes The same three previous variables but introduces the "Burdens" and there you can finally see what is the deal with leverage: Leverage growth increases ROE, but also increases Interest burden, which impacts ROE negatively. So Leverage is in the end a double edge sword for ROE and not a very desirable way to improve the metric.
Your explanation was way better .thank you so much
Amazing Video, it instantly make me understand ideas about DuPont analysis.
Amazing explanation!
YOU ARE A ROCK STAR!
Hi Jimmy, You are explaining every thing very well, Thank You. Could u make a video about ROIC?
Very well explained. Thank you so much.
That was great!! Thank you!!
Well this is a new way of analyzing stocks for me as I use price to sales ratio and then compare the company to its peers.
very good, Jimmy, thanks a lot!
OMG, this is a true gem
Hi Jimmy, are there specific industries the Dupont analysis is more suitable?
Great video, im loving them all. Just one question. You've said that more debt shortens Equity on Financial Leverage. I think that's not true. ROE rises on financial leverage because average Assets goes up when u contract debt. It's a matter of proportion.
Any sort of excel spreadsheet or database to calculate the Dupont formula?
This is giving me PTSD from economics class
LOL
That’s interesting 👍🏼