Understand ROE & DuPont Formula - MMSV as example

Understand ROE & DuPont Formula  

MMSV  as example

In general: ROE = Net Income / Average Total Shareholder Equity

However, if we drill ROE further down by using DuPont Formula

ROE = (Net Income / Total Revenue) X (Total Revenue / Total Assets) X Total Assets / Average Shareholders Equity)

Whereas:

Net Income/Total Revenue = Profitability; the ability to earn income

Total Revenue / Total Assets = Asset Turnover; the ability for operational efficient

Total Assets/ Average Shareholders Equity = Leverage; to check debt ratio

Now use MMSV as example:

Profitability:

Profitability increase from 25.8% in 2015 to 27.9% in 2017. 

MMSV is able to increase its profit margin % every year.

Asset Turnover:

The asset turnover in 2017 is 106%. The management is able to generate 106% of revenue from its total assets. 106% is the highest in 2017.

MMSV has

Leverage:

Leverage is 122% in 2017. What is that means?

Total Asset = Total Liability + Total Shareholder Equity

Assume Total Equity = 100

Thus, Total Asset = 122

Total Liability = 122-100 = 22

Debt ratio = 22/122= 18%

 

Therefore, MMSV is low debt company for the last 5 years.

We can conclude that MMSV is having high ROE are due to high profitability and high asset turnover.