Factor analysis of return on equity

One of the important aspects of the evaluation of the company is to study its effectiveness from the point of view of the owner. Efficiency in this case as in many others, can be assessed by determining the measure of profitability. However, a simple calculation may be insufficient and it will be necessary to complement the analysis. The most popular method is probably the factor analysis of profitability of own capital. Let's focus on the methodologies and the main features.

Factor analysis of return on equity is usually associated with formulas DuPont, which allow you to quickly perform all necessary calculations. It is important to understand how these formulas turned out, besides there is nothing complicated. The return on equity of the owner, obviously, is determined by the ratio of the net profit to the value of capital. Factor model derived from the given relationship by an elementary transformation. Their essence consists in multiplying the numerator and denominator of the revenue and assets. Then easy to see that the efficiency of this part of the capital, its profitability is determined by the product of the indicator of the degree of financial dependence on the turnover of the property (assets) and the level of profitability of sales. After the mathematical model is made directly for analysis. It can be done by any method suitable for deterministic models. Factor analysis of return on equity using the DuPont formula is one of the variations of the method of absolute differences. He, in turn, is a special case of the method of chain substitutions. The basic principle of this method lies in the sequential determination of the impact of each factor in isolation, independently of the other.

It is Worth noting that in the same way carried out factor analysis of economic profitability. It is the ratio of profit to assets. After a small transformation, this index can be represented by the product of the turnover of property of the company profitability of sales. The subsequent analysis is the same way.

Special attention Must be paid to the fact, what metrics should be used in calculations. Obviously, you must use information at least two periods, to be able to observe the changes. The data are taken from the statement of profit and loss are cumulative, as are certain value over a certain period. In the balance sheet data presented on a specific date, so it is best to calculate their average value.

The above Mentioned methods, i.e. method of chain substitutions and modifications, may be used to analyze virtually any deterministic factor model. For example, factor analysis of the current ratio can be done very simply. For greater detail, it is advisable to uncover the formula of this coefficient, reflecting in the numerator components of current assets and the denominator of – short-term obligations. Then you want to calculate the influence of each of the identified factors. It should be noted that for this model it is impossible to apply the absolute difference and the same-named method, as it has a multiple character.

The Value of any analysis is difficult to overestimate, and factor analysis of return on equity and other indicators is one of the best methods for facilitating the adoption of the right managerial decisions. The identification of a strong negative influence that or other factor clearly indicates where to direct the impact. On the other hand, the positive impact may indicate, for example, that certain reserves of profit growth.