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
CoStar Group Inc., decomposition of ROE (quarterly data)
Based on: 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).
The company’s financial performance over the presented quarters reveals distinct trends in the key profitability and leverage metrics.
- Return on Assets (ROA)
- The ROA started at a relatively high level around 7.65% in early 2019, peaking near 8.36% by the third quarter of 2019. However, it experienced a noticeable decline through 2020, reaching a low of approximately 3.28% by the end of that year. Following this decline, ROA stabilized and then exhibited a modest upward trend from 2021 onward, fluctuating in the 3.2% to 4.5% range through mid-2023.
- Financial Leverage
- The financial leverage ratio remained fairly stable over the entire period, starting at 1.13 in early 2019. The ratio increased somewhat during 2020, peaking at about 1.35 in the first quarter of that year. Subsequently, the leverage ratio gradually decreased and stabilized around 1.22 from late 2022 through mid-2023, indicating a consistent and moderate use of debt relative to equity.
- Return on Equity (ROE)
- ROE trends parallel those of ROA but at higher percentage points, beginning near 8.67% in early 2019 and rising to approximately 9.41% by mid-2019. A substantial downturn ensued in 2020, with ROE dropping sharply to around 4.23% by year-end. From 2021 onward, the ROE slowly improved, with values fluctuating between approximately 4.1% and 5.6%, ending near 5.4% in mid-2023.
Overall, the data indicate that profitability, as measured by both ROA and ROE, was robust in 2019 but was significantly impacted during 2020, likely reflecting challenging business conditions. Financial leverage increased during the early part of 2020, which may have contributed to amplified effects on equity returns. The subsequent years show a recovery phase characterized by moderate improvement in profitability metrics and a gradual reduction and stabilization of leverage levels. This suggests a rebalancing of the capital structure and cautiously improving operational efficiency or asset utilization post-2020.
Three-Component Disaggregation of ROE
CoStar Group Inc., decomposition of ROE (quarterly data)
Based on: 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).
The analysis of the financial ratios over the reported quarters reveals distinct trends across profitability, efficiency, leverage, and overall return to equity holders.
- Net Profit Margin
- The net profit margin exhibited a decline from the beginning of 2019, starting at around 21.76%, and maintaining above 20% through the first quarter of 2020. A downward trend is observed during 2020, reaching a low approximately 13.69% by the last quarter of 2020. This lower margin level persisted into 2021, fluctuating around 12-15%. From 2022 through mid-2023, net profit margin showed signs of improvement, regaining levels around 16%, yet still below early 2019 values, indicating partial recovery in profitability.
- Asset Turnover
- Asset turnover began at 0.35 in early 2019 and remained relatively stable near 0.36 through the end of that year. A notable decrease occurred in 2020, dropping to lows around 0.23, reflecting reduced efficiency in generating sales from assets. Since late 2020, asset turnover has gradually improved, rising to approximately 0.27 by mid-2023, although it has not returned to pre-2020 levels. The trend suggests some recovery in asset utilization efficiency, but overall turnover remains depressed relative to the pre-pandemic period.
- Financial Leverage
- Financial leverage ratios stayed constant at about 1.13 during 2019. In 2020, leverage increased, peaking near 1.35 in the first quarter, before gradually declining and stabilizing around 1.22 from late 2022 through mid-2023. The initial increase indicates heightened use of debt or equity financing relative to assets during the early pandemic period, followed by a reduction in financial leverage closer to pre-2020 levels.
- Return on Equity (ROE)
- ROE showed a downward trajectory, starting at approximately 8.67% in early 2019 and declining steadily throughout 2020 to a low near 4.2%. From 2021 onwards, ROE slightly improved but remained relatively low around 5.3% to 5.6%, significantly below the levels observed prior to 2020. This reduction in ROE aligns with the decreases in net profit margin and asset turnover, reflecting overall weaker profitability and efficiency impacting shareholder returns.
In summary, the data indicates the company experienced a period of financial strain beginning in early 2020, coinciding with a marked decrease in profitability, asset efficiency, and shareholder returns, coupled with increased financial leverage. Since 2021, moderate recovery is evident particularly in net profit margins and asset turnover, accompanied by a reduction in leverage, but ROE remains subdued compared to the pre-2020 period. These patterns suggest ongoing challenges in restoring previous profitability and efficiency levels while managing financial structure.
Two-Component Disaggregation of ROA
CoStar Group Inc., decomposition of ROA (quarterly data)
Based on: 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 demonstrated a declining trend from early 2019 through the end of 2020. Starting at 21.76% in March 2019, it peaked slightly in mid-2019 but then gradually decreased to 13.69% by December 2020. This decline suggests increasing costs or reduced pricing power during that period. From 2021 onward, the margin stabilized around the 12-16% range, with a slight upward shift observed during 2022 and early 2023, reaching approximately 16.56% by June 2023. This stabilization and moderate recovery indicate an improvement in profitability after a period of contraction.
- Asset Turnover
- Asset turnover started relatively stable at around 0.35 to 0.36 in early 2019 but experienced a notable decrease throughout 2020, declining to as low as 0.23. This drop indicates the company was generating less revenue per unit of assets during this period, which could be linked to reduced operational efficiency or asset underutilization. After the trough at the end of 2020, asset turnover showed mild improvements, stabilizing around 0.26 to 0.27 in 2021 and subsequently holding steady into mid-2023. The figures suggest a gradual recovery in asset utilization efficiency but have not returned to the 2019 levels.
- Return on Assets (ROA)
- Return on assets mirrored the trends observed in net profit margin and asset turnover. It was relatively strong in early 2019 at approximately 7.65%-8.36%, but it consistently declined through 2020, hitting a low near 3.28% by the end of 2020. This decline reflects the combined effect of lower margins and decreased asset turnover, indicating diminished profitability relative to the asset base. Since 2021, ROA has shown signs of recovery, climbing back gradually to just over 4.4% by mid-2023. This improvement points to enhanced operational performance or tighter cost management, though the ROA remains significantly below pre-2020 levels.