National Oilwell Varco Inc. (NYSE:NOV)

The two-component DuPont analysis reveals a period of relative stability in profitability and a consistent increase in financial gearing from 2011 to 2014, followed by a severe deterioration in performance in 2015.

Return on Assets (ROA)

ROA remained relatively stable between 2011 and 2014, fluctuating within a range of 6.68% to 7.91%. However, a significant reversal occurred in 2015, where ROA dropped to -2.88%, indicating a transition from profitable asset utilization to a net loss.

Financial Leverage

A steady upward trend in financial leverage is observed throughout the five-year period. The ratio increased incrementally from 1.45 in 2011 to 1.63 in 2015. This indicates a progressive increase in the proportion of debt used to finance assets relative to equity.

Return on Equity (ROE)

ROE movements closely mirrored those of ROA but were amplified by the increasing financial leverage. ROE peaked at 12.31% in 2012 and remained above 10% through 2014. In 2015, the combination of a negative ROA and the highest leverage level in the period (1.63) resulted in a magnified negative ROE of -4.69%.

The analysis demonstrates that while financial leverage served as a catalyst to enhance equity returns during profitable years, it acted as a risk multiplier in 2015. The decline in ROE was not driven by a change in capital structure—which remained consistently additive—but by the sharp collapse in fundamental asset profitability.

The Return on Equity (ROE) remained relatively stable between 2011 and 2014, fluctuating within a range of 10.47% to 12.31%. However, a severe contraction occurred in 2015, with ROE falling to -4.69%, signaling a significant deterioration in shareholder returns.

Net Profit Margin

Profitability exhibited a general downward trend over the period. From a peak of 13.60% in 2011, the margin declined to 10.18% by 2013, followed by a brief recovery to 11.67% in 2014. A critical collapse occurred in 2015, where the margin turned negative at -5.21%, identifying profitability as the primary driver of the overall decline in ROE.

Asset Turnover

Operational efficiency improved during the first three years, with the asset turnover ratio increasing from 0.57 in 2011 to 0.66 in 2013. This efficiency plateaued in 2014 at 0.64 before declining to 0.55 in 2015, indicating a reduction in the effectiveness of asset utilization in generating revenue during the final year.

Financial Leverage

A consistent upward trend in financial leverage is observed, rising steadily from 1.45 in 2011 to 1.63 in 2015. This indicates a progressive increase in the company's reliance on debt to finance its asset base throughout the analyzed period.

The DuPont analysis reveals that the stability and subsequent collapse of ROE were dictated by the interaction of these three components. While the steady increase in financial leverage theoretically amplified returns during the growth phase, it could not mitigate the impact of the sharp decline in net profit margins and the dip in asset turnover in 2015. The transition to a negative ROE was fundamentally driven by a collapse in bottom-line profitability.

The Return on Equity (ROE) remained relatively stable between 2011 and 2014, fluctuating between 10.47% and 12.31%, before experiencing a severe contraction to -4.69% in 2015. This overall trend indicates a period of steady performance followed by a significant operational collapse.

Operating Profitability

The EBIT margin was the primary driver of volatility. A downward trend was observed from 2011 to 2013, where margins fell from 20.27% to 15.11%. Despite a partial recovery to 17.01% in 2014, the margin collapsed to -3.31% in 2015, directly causing the negative return on equity.

Asset Efficiency

Asset turnover showed a moderate improvement in the early part of the period, rising from 0.57 in 2011 to a peak of 0.66 in 2013. This efficiency trend reversed in the final two years, declining to 0.55 by 2015, which indicates a diminished ability to generate revenue from the company's asset base.

Financial Leverage

Financial leverage increased consistently every year, moving from 1.45 in 2011 to 1.63 in 2015. This steady increase in the debt-to-equity relationship likely amplified the returns during the profitable years but contributed to the severity of the ROE decline once operating margins turned negative.

Tax and Interest Burdens

Between 2011 and 2014, the tax burden and interest burden remained highly stable, with the former fluctuating slightly around 0.70 and the latter maintaining a ratio near 0.98. These metrics suggest that changes in tax obligations and interest expenses were not significant factors in the overall movement of ROE during the observed period.

The Return on Assets (ROA) exhibited relative stability between 2011 and 2014, maintaining a range between 6.68% and 7.91%. However, a severe contraction occurred in 2015, with ROA falling to -2.88%. This decline is attributed to a simultaneous collapse in profitability and a decrease in asset efficiency.

Net Profit Margin

A general downward trajectory is observed in profitability from 2011 to 2013, as the margin decreased from 13.60% to 10.18%. Despite a brief recovery to 11.67% in 2014, the margin experienced a sharp reversal in 2015, plummeting to -5.21%. This volatility indicates a significant erosion of earnings relative to revenue toward the end of the period.

Asset Turnover

Asset utilization showed an initial improvement phase, rising from 0.57 in 2011 to a peak of 0.66 in 2013. This efficiency remained relatively stable through 2014 at 0.64 before declining to 0.55 in 2015. The reduction in the final year suggests a decrease in the company's ability to generate revenue from its asset base.

ROA Component Interaction

Between 2011 and 2013, the improvement in asset turnover acted as a partial hedge against declining profit margins, which prevented a substantial drop in ROA. However, by 2015, the positive correlation between the decline in both net profit margin and asset turnover resulted in a negative return on assets, signaling a critical breakdown in both operational efficiency and pricing power.

The return on assets (ROA) remained relatively stable between 2011 and 2014, fluctuating within a range of 6.68% to 7.91%, before experiencing a severe contraction to -2.88% in 2015. This trajectory indicates a significant collapse in overall profitability toward the end of the analyzed period, driven primarily by operational deterioration.

Operating Profitability

The EBIT margin exhibited a general downward trend from a peak of 20.27% in 2011 to 15.11% in 2013, with a brief recovery to 17.01% in 2014. A critical reversal occurred in 2015, where the margin fell to -3.31%, indicating that operating expenses exceeded operating revenues and serving as the dominant factor in the negative ROA for that year.

Asset Utilization

Asset turnover showed an initial improvement, rising from 0.57 in 2011 to a peak of 0.66 in 2013, which suggests increased efficiency in utilizing assets to generate sales. However, this efficiency declined to 0.64 in 2014 and further dropped to 0.55 in 2015, reflecting a reduction in revenue-generating capacity relative to the asset base.

Tax and Interest Burdens

Through 2014, the tax burden remained consistent, ranging between 0.68 and 0.71. Similarly, the interest burden was stable, fluctuating slightly between 0.97 and 0.99. These metrics suggest that changes in the company's tax position and debt servicing costs played a negligible role in the volatility of the ROA during this period.

The net profit margin exhibited a general downward trajectory between 2011 and 2015, culminating in a transition from positive profitability to a net loss. While there was a brief recovery in 2014, the overall trend indicates a significant deterioration in the company's ability to convert revenue into net income.

EBIT Margin Analysis

Operational profitability experienced a steady decline from 20.27% in 2011 to 15.11% in 2013. Although a marginal recovery to 17.01% occurred in 2014, the margin collapsed to -3.31% by December 31, 2015. This sharp reversal suggests a critical failure in operational efficiency or a severe contraction in market demand during the final period.

Tax Burden and Interest Burden

The tax burden remained relatively stable, fluctuating minimally between 0.68 and 0.71 from 2011 to 2014. Similarly, the interest burden showed negligible variance, maintaining a range between 0.99 and 0.97 over the same period. The consistency of these ratios indicates that neither tax obligations nor interest expenses were the primary drivers of the profit margin's volatility.

Net Profit Margin Disaggregation

The disaggregation of the net profit margin reveals that the erosion of the bottom line was almost entirely driven by the contraction of the EBIT margin. The net profit margin mirrored the operational trend, falling from 13.60% in 2011 to a deficit of -5.21% in 2015. Because the tax and interest burdens remained constant, the decline in net profitability is attributable to a decline in operating income rather than financing costs or tax increases.