DuPont Analysis: Disaggregation of ROE, ROA, and Net Profit Margin
Decomposing ROE involves expressing net income divided by shareholders’ equity as the product of component ratios.
Two-Component Disaggregation of ROE
Etsy Inc., decomposition of ROE
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
- Return on Assets (ROA)
- The ROA exhibited a fluctuating trend over the five-year period. It started at 13.51% in 2017 and decreased to 8.59% in 2018, followed by a further decline to 6.22% in 2019. However, the ratio rebounded sharply to 14.52% in 2020 before slightly decreasing to 12.88% in 2021. This pattern suggests a period of declining asset efficiency until 2019, with a recovery phase in the subsequent years.
- Financial Leverage
- Financial leverage increased significantly throughout the period, starting at a ratio of 1.53 in 2017. It rose steadily to 2.25 in 2018 and then more sharply to 3.79 in 2019. After a moderate decline to 3.24 in 2020, leverage climbed markedly to 6.10 by the end of 2021. This upward trajectory indicates an increasing reliance on debt or other leveraged financing methods over the years.
- Return on Equity (ROE)
- ROE demonstrated strong growth, beginning at 20.61% in 2017 and experiencing a slight dip to 19.33% in 2018. It then increased to 23.58% in 2019, followed by a dramatic jump to 47.04% in 2020. The upward trend accelerated, reaching an exceptionally high 78.51% in 2021. This surge in ROE, particularly in 2020 and 2021, may be attributed to the increased financial leverage and improved profitability, reflecting greater efficiency in generating shareholder returns.
Three-Component Disaggregation of ROE
Etsy Inc., decomposition of ROE
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
- Net Profit Margin
- The net profit margin exhibited a decreasing trend from 18.54% in 2017 to 11.72% in 2019, indicating a decline in profitability relative to revenue during this period. However, beginning in 2020, the margin improved significantly, rising to 20.24% and then slightly increasing again to 21.19% in 2021, suggesting enhanced cost control or revenue quality in the more recent years.
- Asset Turnover
- The asset turnover ratio declined from 0.73 in 2017 to a low of 0.53 in 2019, implying reduced efficiency in using assets to generate sales during these years. A recovery is noted in 2020, where it increased to 0.72, followed by a slight drop to 0.61 in 2021, reflecting some fluctuations but overall a moderate efficiency level in asset utilization at the end of the period.
- Financial Leverage
- Financial leverage showed a consistent upward trend across the period, starting at 1.53 in 2017 and reaching 6.1 by 2021. This marked increase indicates a growing reliance on debt financing or other liabilities, which could amplify returns but also potentially increase financial risk.
- Return on Equity (ROE)
- ROE demonstrated a strong upward trajectory from 20.61% in 2017 to an exceptionally high 78.51% in 2021. This steep rise, especially after 2019, reflects significant improvements in generating shareholder returns. The increase in financial leverage likely contributed to magnifying these returns, although this also points to increased financial risk exposure.
Five-Component Disaggregation of ROE
Etsy Inc., decomposition of ROE
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
- Tax Burden
- The tax burden ratio demonstrates a declining trend from 2.54 in 2017 to 0.95 in 2020, followed by a slight increase to 1.05 in 2021. This suggests a steady reduction in tax expenses relative to earnings before tax over the initial four years, with a marginal reversal in the last year observed.
- Interest Burden
- The interest burden ratio shows a gradual improvement from 0.74 in 2017 to 0.98 in 2021. This indicates a decreasing impact of interest expenses on earnings before interest and taxes, signifying better management of interest costs or a reduction in interest-bearing debt relative to operating earnings.
- EBIT Margin
- There is a notable increase in EBIT margin, rising from 9.83% in 2017 to a peak of 23.63% in 2020, before slightly declining to 20.67% in 2021. This reflects enhanced operating profitability over the period, with a particularly strong performance in 2020.
- Asset Turnover
- The asset turnover ratio shows some volatility, decreasing from 0.73 in 2017 to 0.53 in 2019, followed by an improvement to 0.72 in 2020 and a drop again to 0.61 in 2021. This variability suggests changes in the efficiency of using assets to generate revenue, with peak efficiency in 2017 and 2020.
- Financial Leverage
- Financial leverage has increased significantly over the period, starting at 1.53 in 2017 and rising to 6.1 in 2021. This indicates a substantial increase in the use of debt financing or equity leverage, which could amplify returns but also increases financial risk.
- Return on Equity (ROE)
- ROE exhibits a strong upward trend, growing from 20.61% in 2017 to an outstanding 78.51% in 2021. This substantial increase is likely influenced by improved profitability margins and considerable financial leverage, signaling enhanced shareholder value creation but also potential risk due to higher leverage.
Two-Component Disaggregation of ROA
Etsy Inc., decomposition of ROA
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
- Net Profit Margin
- The net profit margin demonstrated a fluctuating trend over the analyzed periods. Starting at 18.54% in 2017, it experienced a decline to 12.84% in 2018 and further to 11.72% in 2019. Subsequently, a notable increase occurred in 2020, reaching 20.24%, and this upward momentum continued modestly to 21.19% in 2021. This pattern indicates a period of reduced profitability followed by a recovery and improvement in profit margins in the later years.
- Asset Turnover
- Asset turnover showed a general downward trend with some variability. It began at 0.73 in 2017, then decreased to 0.67 in 2018 and further declined to 0.53 in 2019. A recovery was seen in 2020 with an increase to 0.72, although this was not sustained, as the ratio dropped again to 0.61 in 2021. This suggests fluctuations in the efficiency of asset use to generate revenue, with a notable dip in 2019 and partial recuperation thereafter.
- Return on Assets (ROA)
- The return on assets mirrored the trends observed in net profit margin and asset turnover, with overall variability. ROA started at 13.51% in 2017, followed by a decline to 8.59% in 2018 and a further drop to 6.22% in 2019. It rebounded significantly in 2020 to 14.52%, before slightly decreasing to 12.88% in 2021. The data reflects a period of reduced operational efficiency and profitability from assets during 2018-2019, succeeded by a marked improvement in subsequent years.
- Overall Analysis
- The financial ratios indicate that profitability and asset efficiency experienced a downturn in 2018 and 2019, with both net profit margin and ROA reaching their lowest points in 2019. However, a substantial recovery occurred in 2020, as evidenced by increased net profit margins and return on assets, although asset turnover did not fully regain its initial levels by 2021. The improvement in profitability ratios suggests enhanced cost management or pricing strategies, while variations in asset turnover may imply changes in asset utilization or revenue generation effectiveness.
Four-Component Disaggregation of ROA
Etsy Inc., decomposition of ROA
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
- Tax Burden
- The tax burden ratio demonstrates a consistent decline from 2.54 in 2017 to 0.95 in 2020, with a slight increase to 1.05 in 2021. This indicates a generally decreasing impact of taxes on earnings over the observed period, potentially contributing positively to after-tax profitability in recent years.
- Interest Burden
- The interest burden has gradually improved from 0.74 in 2017 to 0.98 in 2021. This upward trend suggests that the company has increasingly reduced the proportion of income consumed by interest expenses, reflecting better management of debt costs or reduced leverage over time.
- EBIT Margin
- The EBIT margin shows a significant increase starting at 9.83% in 2017, rising steadily to 12.83% by 2019, and then surging to a peak of 23.63% in 2020. However, it declined to 20.67% in 2021. This pattern indicates expanding operational profitability through 2020 before experiencing a moderate contraction in the final year.
- Asset Turnover
- Asset turnover has fluctuated over the period, starting at 0.73 in 2017, declining to a low of 0.53 in 2019, rebounding to 0.72 in 2020, and then decreasing again to 0.61 in 2021. This volatility suggests varying efficiency in using assets to generate revenue, with no clear upward or downward long-term trend.
- Return on Assets (ROA)
- The return on assets trends downward from 13.51% in 2017 to 6.22% in 2019, before recovering sharply to 14.52% in 2020 and slightly decreasing to 12.88% in 2021. This reflects a period of reduced asset profitability followed by a strong recovery, likely influenced by improvements in EBIT margin and interest burden noted previously.
Disaggregation of Net Profit Margin
Etsy Inc., decomposition of net profit margin ratio
Based on: 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31).
- Tax Burden
- The tax burden ratio shows a general decreasing trend from 2.54 in 2017 to 0.95 in 2020, indicating a reduction in the effective tax rate over this period. There is a slight increase to 1.05 in 2021, suggesting a modest rise in the tax impact relative to earnings after interest and taxes.
- Interest Burden
- The interest burden ratio demonstrates a gradual improvement year over year, increasing from 0.74 in 2017 to 0.98 in 2021. This trend indicates a declining interest expense relative to earnings before interest and taxes, implying enhanced financial leverage or reduced interest costs over time.
- EBIT Margin
- The EBIT margin exhibits a strong upward trajectory from 9.83% in 2017 to a peak of 23.63% in 2020, reflecting significant improvement in operational profitability. However, in 2021, there is a decline to 20.67%, indicating some contraction in operating efficiency or increased costs affecting earnings before interest and taxes.
- Net Profit Margin
- The net profit margin decreases from 18.54% in 2017 to 11.72% in 2019, suggesting diminishing profitability after all expenses initially. From 2019 onwards, there is a pronounced recovery, with the margin rising to 20.24% in 2020 and further to 21.19% in 2021, emphasizing a strong rebound in overall profitability and effective cost management or revenue growth during those years.