DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
Quarterly Data
Decomposing ROE involves expressing net income divided by shareholders’ equity as the product of component ratios.
Two-Component Disaggregation of ROE
Align Technology Inc., decomposition of ROE (quarterly data)
Based on: 10-Q (reporting date: 2023-09-30), 10-Q (reporting date: 2023-06-30), 10-Q (reporting date: 2023-03-31), 10-K (reporting date: 2022-12-31), 10-Q (reporting date: 2022-09-30), 10-Q (reporting date: 2022-06-30), 10-Q (reporting date: 2022-03-31), 10-K (reporting date: 2021-12-31), 10-Q (reporting date: 2021-09-30), 10-Q (reporting date: 2021-06-30), 10-Q (reporting date: 2021-03-31), 10-K (reporting date: 2020-12-31), 10-Q (reporting date: 2020-09-30), 10-Q (reporting date: 2020-06-30), 10-Q (reporting date: 2020-03-31), 10-K (reporting date: 2019-12-31), 10-Q (reporting date: 2019-09-30), 10-Q (reporting date: 2019-06-30), 10-Q (reporting date: 2019-03-31).
- Return on Assets (ROA)
- The ROA exhibited a generally strong performance in 2019, maintaining values around 16.8% to 17.8%. There was a notable surge throughout 2020, peaking at 47.65% in the first quarter, followed by a gradual decline to 36.77% by the end of that year. Entering 2021, ROA dropped sharply to single digits initially but then stabilized in the low double digits for most of the year. In 2022 and into 2023, a steady downward trend was observed, ultimately reaching lows just above 5% by the third quarter of 2023. This pattern suggests an initial period of heightened asset efficiency, followed by diminishing returns on assets over the subsequent years.
- Financial Leverage
- Financial leverage ratios fluctuated moderately over the analyzed period, starting around 1.7 to 1.8 in 2019. A decline to approximately 1.39 was observed during the early months of 2020, followed by a gradual increase through the remainder of 2020 and into 2021, reaching approximately 1.64 to 1.65. From 2022 onwards, leverage remained relatively stable within the range of 1.6 to 1.7, with minor fluctuations. This indicates a consistent and conservative use of debt relative to equity, with some variations likely reflecting strategic financing adjustments during volatile market conditions.
- Return on Equity (ROE)
- ROE trends mirrored those of ROA but with greater amplitude due to leverage effects. The company maintained ROE levels around 30% to 33% during 2019. In 2020, there was a significant increase peaking at 66.21% in the first quarter, followed by a steady decrease to approximately 54.92% by the end of that year. The first quarter of 2021 showed a sharp drop to 13.5%, with a partial recovery to around 21% through the end of 2021. From 2022 through mid-2023, ROE declined consistently, reaching lows near 8% to 9.5% by the third quarter of 2023. The volatility and eventual reduction in ROE signify challenges in generating equity returns at prior levels, potentially influenced by operational or market pressures.
- Overall Analysis
- The financial ratios collectively suggest a period of strong profitability and efficient asset utilization in early years, especially during 2020, with unusually high returns that gradually normalized thereafter. The decline in both ROA and ROE from 2021 onward points to reduced profitability or asset efficiency. The stable financial leverage indicates that these profitability shifts were not primarily driven by changes in financial structure. The trends imply a need to investigate underlying operational factors or market conditions affecting return metrics in recent periods.
Three-Component Disaggregation of ROE
Align Technology Inc., decomposition of ROE (quarterly data)
Based on: 10-Q (reporting date: 2023-09-30), 10-Q (reporting date: 2023-06-30), 10-Q (reporting date: 2023-03-31), 10-K (reporting date: 2022-12-31), 10-Q (reporting date: 2022-09-30), 10-Q (reporting date: 2022-06-30), 10-Q (reporting date: 2022-03-31), 10-K (reporting date: 2021-12-31), 10-Q (reporting date: 2021-09-30), 10-Q (reporting date: 2021-06-30), 10-Q (reporting date: 2021-03-31), 10-K (reporting date: 2020-12-31), 10-Q (reporting date: 2020-09-30), 10-Q (reporting date: 2020-06-30), 10-Q (reporting date: 2020-03-31), 10-K (reporting date: 2019-12-31), 10-Q (reporting date: 2019-09-30), 10-Q (reporting date: 2019-06-30), 10-Q (reporting date: 2019-03-31).
- Net Profit Margin
- The net profit margin exhibited significant fluctuations over the analyzed periods. Initially, the margin ranged between approximately 18% and 19%, maintaining relative stability. A sharp increase occurred in early 2020, where margins peaked above 70%, indicating an unusual spike in profitability during that time frame. This peak was followed by a considerable decline starting in 2021, with margins gradually decreasing each quarter, reaching levels below 10% by late 2023. The trend suggests a return to normalized profitability after the exceptional spike, followed by a period of deteriorating margin performance.
- Asset Turnover
- The asset turnover ratio demonstrated a decline from nearly 0.95 in 2019 to a low of approximately 0.51 in late 2020, indicating reduced efficiency in generating revenue from assets during this period. Beginning in early 2021, a modest recovery trend appeared, with ratios increasing to around 0.68 by early 2022. However, this improvement was not sustained, as asset turnover gradually declined again to near 0.6 by late 2023. The fluctuation suggests periods of operational adjustments, with recent quarters showing slightly diminished asset utilization efficiency.
- Financial Leverage
- Financial leverage ratios decreased noticeably in the first half of 2020, dropping from approximately 1.8 in 2019 to about 1.4–1.5 levels. This reduction indicates a lower reliance on debt or other leveraged sources during that period. Subsequently, leverage increased gradually from 2021 through 2023, reaching nearly 1.7, pointing to a progressive increase in the use of financial leverage over recent quarters. The moderate upward leverage trend may reflect strategic financing decisions or changing capital structure priorities.
- Return on Equity (ROE)
- ROE displayed a volatile trend correlated with changes in net profit margin and financial leverage. Starting near 30% in 2019, ROE sharply rose to exceed 50% in early 2020, corresponding with the spike in net profit margins and reduced leverage. After this peak, ROE experienced a pronounced decline through 2021 and 2022, ultimately falling below 10% by late 2023. The decreasing ROE indicates reduced effectiveness in generating shareholder returns from equity, likely driven by lower profitability and modestly increasing leverage in recent periods.
Two-Component Disaggregation of ROA
Align Technology Inc., decomposition of ROA (quarterly data)
Based on: 10-Q (reporting date: 2023-09-30), 10-Q (reporting date: 2023-06-30), 10-Q (reporting date: 2023-03-31), 10-K (reporting date: 2022-12-31), 10-Q (reporting date: 2022-09-30), 10-Q (reporting date: 2022-06-30), 10-Q (reporting date: 2022-03-31), 10-K (reporting date: 2021-12-31), 10-Q (reporting date: 2021-09-30), 10-Q (reporting date: 2021-06-30), 10-Q (reporting date: 2021-03-31), 10-K (reporting date: 2020-12-31), 10-Q (reporting date: 2020-09-30), 10-Q (reporting date: 2020-06-30), 10-Q (reporting date: 2020-03-31), 10-K (reporting date: 2019-12-31), 10-Q (reporting date: 2019-09-30), 10-Q (reporting date: 2019-06-30), 10-Q (reporting date: 2019-03-31).
- Net Profit Margin
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The net profit margin shows significant fluctuations over the observed periods. Initially, it maintained a relatively stable level around 18%, with minor variations from March 2019 through December 2019. A pronounced and atypical surge occurred in 2020, where margins increased sharply to levels above 70%, peaking near 78%. This spike is unusual and may indicate either an extraordinary event or accounting anomaly during that year. Following this period, starting in 2021, the net profit margin sharply reverted to a range similar to pre-2020 levels, around 16-20%, but then showed a gradual decline through 2023, ending near 9.5%. This indicates progressively decreasing profitability relative to revenue in recent quarters.
- Asset Turnover
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The asset turnover ratio started close to 0.93 in early 2019, remaining relatively steady until the end of 2019. A notable decline occurred entering 2020, with the ratio dropping to a low of approximately 0.51 by the end of 2020. This trend reflects reduced efficiency in generating sales from assets during that period. From 2021 onwards, the ratio exhibited a modest recovery, gradually rising to peak near 0.69 in mid-2022. However, since then, a gentle downward trend is observed, ending near 0.60 by the latest quarter. Overall, asset utilization efficiency weakened in 2020 but partially recovered and stabilized afterward.
- Return on Assets (ROA)
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The ROA follows a pattern similar to the other key metrics. Early data from 2019 show stable performance with returns on assets around 17-18%. There is a marked and sharp increase in 2020, with ROA peaking above 47% in the first quarter and slightly declining but maintaining elevated levels through the year. This is consistent with the drastic increase in net profit margin during the same period, suggesting unusual profitability. However, from 2021 forward, ROA decreases substantially, falling to nearly 5-6% by late 2023. This decline in ROA signals a reduction in asset profitability, suggesting that assets are generating significantly less net income than in previous periods.
- Summary
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Overall, the financial ratios indicate a period of exceptional and probably non-recurring profitability and asset efficiency in 2020, where net profit margins and ROA surged dramatically while asset turnover declined. This period appears to be an outlier in the company's historical pattern. Before and after this event, profitability and asset efficiency metrics align more closely, with moderate net profit margins around 15-20% earlier and falling toward single digits in recent quarters. Asset turnover shows a decrease in 2020 but recovers somewhat before trending down again slightly. Recent trends highlight gradually declining profitability and diminishing returns from asset usage, which may warrant further investigation into operational efficiency and cost management.