DuPont Analysis - Dissecting ROE

• Return of Equity (ROE) reveal how much the company is making compared with how much it has invested to make that. 
• ROE = Net Inome / Equity
• It is one of the most important indicators of a firm’s profitability and potential growth
• Companies that boast a high ROE with little or no debt are able
• to grow without large capital expenditures
• allowing the owners of the business to withdrawal cash and reinvest it elsewhere
•  DuPont equation
• ROE = Net Income/Equity 
• = Net Income/Sales * Sales/Total Assets * Total Assets / Equity -
  The sales and total asset on the right side of the equation negate each other, seeing as one is in the numerator and one is in the denominator
• = Net Income Margin * Asset Turn Over * Financial Leverage
• It tells where a company's strength lies and where there is room for improvement
•  A firm can achieve higher ROE if
• Higher Net Income Margin & asset turn over
• Increase Financial Leverage  - when times are good, leverage amplifies ROE, but in bad times, it can hurt ROE badly. And, too much leverage can make a company becoming risky in time of economic downturn and financial crisis.
• It is important to look at the long-term trend in ROE to make sure that it is not steadily declining significantly.
• One must be aware about the economic cycles and that when a company grows bigger, it is harder to continue improving its ROE which is already high. 

References:-

• Dissecting ROE, DuPont Analysis Kimlun Vs Pintaras kcchongnz (private)
• Decoding DuPont Analysis - investopedia