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
Edwards Lifesciences Corp., decomposition of ROE (quarterly data)
Based on: 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), 10-K (reporting date: 2018-12-31), 10-Q (reporting date: 2018-09-30), 10-Q (reporting date: 2018-06-30), 10-Q (reporting date: 2018-03-31).
- Return on Assets (ROA) Trend
- The return on assets showed a generally increasing pattern from early 2018 through early 2020, rising from 9.61% in March 2018 to a peak of 18.23% in March 2020. This was followed by a notable decline during the mid-2020 quarters, falling to approximately 11.38% by the end of 2020. Starting in early 2021, the ROA improved again, reaching levels close to 18% by the last quarter of 2021.
- Financial Leverage Trend
- Financial leverage exhibited a gradual decreasing trend over the period analyzed. Beginning at a leverage ratio of around 1.79 in March 2018, the ratio steadily declined to 1.46 by December 2021. There were slight fluctuations along the way, including a brief increase in mid-2020; however, the overall direction suggests a modest reduction in reliance on debt financing relative to equity.
- Return on Equity (ROE) Trend
- Return on equity increased consistently from 17.25% in March 2018 to a high of 28.4% in March 2020. Similar to the ROA, there was a decline during 2020, reaching a low of 18% in December of that year. Subsequently, ROE rebounded significantly in 2021, achieving a peak near 28.5% in June 2021 and maintaining elevated levels towards the year's end.
- Interrelation Between Metrics
- The observed trends in ROA and ROE closely align, with both metrics increasing sharply through early 2020, facing declines amid 2020, and recovering thereafter. The relatively steady, slightly declining financial leverage during the period indicates that the variations in ROE and ROA were not primarily driven by changes in financial leverage. This suggests that operational performance and asset efficiency were the main contributors to profitability variations.
- Insights and Implications
- The profitability indicators reveal strong operational performance improvements until early 2020, followed by a challenging period likely linked to external factors impacting profitability in 2020. The recovery in 2021 reflects resilient business fundamentals and effective management of assets. The steady decrease in financial leverage points to a cautious approach to financial risk, potentially enhancing financial stability. Overall, the company's profitability and asset management demonstrate positive momentum with manageable leverage levels.
Three-Component Disaggregation of ROE
Edwards Lifesciences Corp., decomposition of ROE (quarterly data)
Based on: 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), 10-K (reporting date: 2018-12-31), 10-Q (reporting date: 2018-09-30), 10-Q (reporting date: 2018-06-30), 10-Q (reporting date: 2018-03-31).
- Net Profit Margin
- The net profit margin showed an overall upward trend from early 2018 to the end of 2019, increasing from 16.25% in March 2018 to a peak of 24.08% in December 2019. However, in 2020, the margin declined notably, reaching approximately 17–19% range for most quarters. In 2021, a strong recovery and significant improvement were observed, with margins rising sharply to nearly 29% by mid-year and staying close to this elevated level through the end of the year.
- Asset Turnover
- The asset turnover ratio remained fairly stable around the 0.6 to 0.7 range throughout the period studied. It showed a moderate increase in early 2020, peaking at 0.74 in March 2020, followed by a gradual decline to around 0.62 by the end of 2021. This suggests a slight decrease in efficiency in generating sales from assets in the most recent quarters.
- Financial Leverage
- Financial leverage gradually decreased from 1.79 in March 2018 to roughly 1.46 by the end of 2021. This points to a consistent reduction in reliance on debt relative to equity over the time period, indicating a more conservative capital structure or deleveraging strategy employed by the company.
- Return on Equity (ROE)
- The ROE displayed a rising trend from 17.25% in March 2018 to a peak of 28.4% in March 2020. Similar to the net profit margin, ROE experienced a decline during most of 2020 but rebounded strongly in 2021, reaching a high of 28.49% mid-year and maintaining a robust level through the end of the year. The fluctuations in ROE align with changes in net profit margin and financial leverage, reflecting the combined effects of profitability and capital structure adjustments.
- Overall Insights
- The company demonstrated improving profitability and operational efficiency leading up to 2019, with notable gains in net profit margin and ROE. There was a temporary setback in 2020, potentially linked to external factors impacting performance, manifested in decreased margins and returns. Nevertheless, a strong recovery in 2021 was evident, with enhanced profitability metrics and sustained lower financial leverage. The slight decline in asset turnover towards the end suggests an area to monitor for operational efficiency.
Two-Component Disaggregation of ROA
Edwards Lifesciences Corp., decomposition of ROA (quarterly data)
Based on: 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), 10-K (reporting date: 2018-12-31), 10-Q (reporting date: 2018-09-30), 10-Q (reporting date: 2018-06-30), 10-Q (reporting date: 2018-03-31).
The financial analysis reveals notable variations and trends across net profit margin, asset turnover, and return on assets (ROA) over the examined quarterly periods.
- Net Profit Margin (%)
- The net profit margin exhibited an overall increasing trend from the initial period through to the end, despite some fluctuations. It rose steadily from 16.25% in the first quarter of 2018, reaching a transition point around the fourth quarter of 2019 where it peaked at 24.08%. Subsequently, there was a decline during 2020, with margins dropping to a low of 17.21% in mid-2020. However, the margin recovered significantly throughout 2021, reaching a high of 29.69% in the second quarter, before slightly decreasing but remaining elevated relative to earlier years. This suggests an overall improvement in profitability with some temporary setbacks likely linked to external or operational factors during 2020.
- Asset Turnover (ratio)
- Asset turnover ratios demonstrated moderate stability with minor fluctuations. Starting at 0.59 in early 2018, the ratio generally increased, peaking at 0.74 in the first quarter of 2020, which indicates more efficient use of assets in generating revenue during this period. Following this peak, the ratio declined gradually to 0.61 by the end of 2020 and then showed a slight recovery to around 0.62 in the subsequent quarters of 2021. The overall pattern suggests consistent asset utilization with temporary gains and slight contractions.
- Return on Assets (ROA) (%)
- The ROA mirrored some of the movements observed in net profit margin and asset turnover, with an initial upward trend from 9.61% in early 2018 to a peak of 18.23% in the first quarter of 2020. This peak corresponds with both a high net profit margin and asset turnover, reflecting a period of strong operational performance and asset efficiency. Post-peak, ROA declined to around 11.38% by the end of 2020, indicative of weaker performance during that period. However, a significant recovery occurred in 2021, with ROA reaching 19.09% by the second quarter before a slight decrease, maintaining relatively high profitability and efficiency compared to previous years.
Overall, the data illustrates a company demonstrating generally improving profitability and asset utilization over the multi-year period, punctuated by a downturn in 2020 likely attributable to external economic conditions. The recovery in 2021 is strong across all examined metrics, pointing to effective management and operational adjustments that enhanced profitability and asset efficiency.