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
Northrop Grumman Corp., decomposition of ROE
Based on: 10-K (reporting date: 2022-12-31), 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).
- Return on Assets (ROA)
- The return on assets exhibited a fluctuating trend over the observed periods. Starting at 8.58% in 2018, there was a decline to 5.47% in 2019, followed by a moderate recovery to 7.17% in 2020. A significant increase occurred in 2021, reaching a peak of 16.45%, before declining again to 11.19% in 2022. Overall, the ROA suggests variability in efficiency in utilizing assets to generate profit, with a notable improvement in 2021.
- Financial Leverage
- Financial leverage showed a consistent downward trend throughout the years. Beginning at a ratio of 4.6 in 2018, it slightly increased to 4.66 in 2019, but then steadily decreased each year thereafter to 4.2 in 2020, 3.29 in 2021, and 2.86 in 2022. This decline indicates a reduction in the use of debt relative to equity, suggesting a shift towards a more conservative capital structure over time.
- Return on Equity (ROE)
- Return on equity experienced substantial fluctuations during the period analyzed. Initial ROE was strong at 39.44% in 2018, but it fell markedly to 25.49% in 2019. The ratio then increased to 30.14% in 2020, followed by a significant surge to 54.19% in 2021. Subsequently, ROE decreased to 31.97% in 2022. These variations could be influenced by changes in operational efficiency, asset management, and the company's leverage strategy.
Three-Component Disaggregation of ROE
Northrop Grumman Corp., decomposition of ROE
Based on: 10-K (reporting date: 2022-12-31), 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).
- Net Profit Margin
- The net profit margin exhibited variability over the period, starting at 10.73% in 2018, declining to a low of 6.64% in 2019, before recovering to 8.67% in 2020. A significant increase occurred in 2021, reaching 19.64%, followed by a decline to 13.38% in 2022. This indicates fluctuations in profitability efficiency with a peak in 2021.
- Asset Turnover
- Asset turnover showed a gradual and modest increase across the years, beginning at 0.80 in 2018 and rising steadily to 0.84 by 2021, maintaining that level in 2022. This suggests a slight improvement in the company's ability to generate revenue from its assets over the time frame.
- Financial Leverage
- Financial leverage decreased consistently from 4.60 in 2018 to 2.86 in 2022. This downward trend indicates a reduction in the reliance on debt financing or an increase in equity base relative to assets, contributing to a potentially lower financial risk profile over the years.
- Return on Equity (ROE)
- ROE demonstrated significant volatility, starting at a high of 39.44% in 2018, declining sharply to 25.49% in 2019, then recovering to 30.14% in 2020. In 2021, ROE surged dramatically to 54.19%, followed by a decrease to 31.97% in 2022. These fluctuations appear aligned with changes in net profit margin and financial leverage, reflecting the combined impact of operational performance and capital structure on shareholder returns.
- Overall Insights
- The trends reveal an overall improvement in asset utilization and a consistent reduction in financial leverage, which likely contributed to a fluctuating but generally strong ROE. Profitability showed notable variability, peaking in 2021, which may correspond to specific operational or market factors during that year. The combination of decreasing leverage and improving asset efficiency suggests a strategic shift towards reducing financial risk while maintaining or enhancing returns.
Five-Component Disaggregation of ROE
Northrop Grumman Corp., decomposition of ROE
Based on: 10-K (reporting date: 2022-12-31), 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).
- Tax Burden
- The tax burden ratio displayed minor fluctuations over the five-year period, remaining within a relatively narrow range from 0.78 to 0.88. The lowest value appeared in 2021 at 0.78, indicating a decrease in tax expenses relative to pretax income, followed by a rise to 0.84 in 2022, suggesting some recovery in tax obligations.
- Interest Burden
- This ratio showed moderate variability, initially declining from 0.87 in 2018 to 0.83 in 2019, then recovering to 0.94 in 2021 before a slight decrease to 0.92 in 2022. The trend implies that interest expenses relative to earnings before interest and taxes fluctuated but generally improved after 2019, indicating some reduction in interest burden over time.
- EBIT Margin
- The EBIT margin exhibited significant volatility, with a notable dip in 2019 to 9.09% from 14.3% in 2018, followed by moderate recovery in 2020. A pronounced peak appeared in 2021 at 26.62%, signaling strong operational profitability during that year. This was followed by a decline in 2022 to 17.33%, yet maintaining a higher level than most previous years, reflecting an overall trend of improved earnings efficiency despite fluctuations.
- Asset Turnover
- Asset turnover remained relatively stable throughout the period, gently increasing from 0.80 in 2018 to 0.84 in 2021 and 2022. This consistency suggests steady efficiency in using assets to generate revenue, with only marginal gains over the years.
- Financial Leverage
- There was a clear downward trend in financial leverage, decreasing from 4.6 in 2018 to 2.86 in 2022. This decline indicates a substantial reduction in reliance on debt financing relative to equity, representing a strengthening of the capital structure and potentially lower financial risk.
- Return on Equity (ROE)
- ROE displayed considerable variation over the timeframe, starting at 39.44% in 2018, dropping to a low of 25.49% in 2019, then rising steadily to a peak of 54.19% in 2021 before moderating to 31.97% in 2022. This pattern reflects fluctuating profitability relative to shareholders' equity, with 2021 being a standout year in terms of generating returns. The subsequent decline suggests some normalization, though ROE remained above 2019 levels.
Two-Component Disaggregation of ROA
Northrop Grumman Corp., decomposition of ROA
Based on: 10-K (reporting date: 2022-12-31), 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).
- Net Profit Margin
- The net profit margin experienced fluctuations over the observed five-year period. It declined from 10.73% at the end of 2018 to a low of 6.64% in 2019, indicating a reduction in profitability during that year. Subsequently, it improved to 8.67% by the end of 2020, then surged significantly to reach a peak of 19.64% in 2021. In 2022, the margin decreased to 13.38%, remaining above the levels seen in the initial years but below the 2021 high, suggesting a period of strong profitability followed by a partial normalization.
- Asset Turnover
- The asset turnover ratio demonstrated a steady upward trend throughout the period. Starting at 0.80 in 2018, it incrementally increased each year, reaching 0.84 by 2021 and maintaining that level into 2022. This indicates a modest improvement in the efficiency with which the company's assets were utilized to generate revenue, suggesting enhanced operational performance or asset management.
- Return on Assets (ROA)
- The return on assets followed a trajectory similar to that of the net profit margin. It dropped from 8.58% in 2018 to 5.47% in 2019, reflecting diminished asset profitability. Afterward, it recovered to 7.17% by 2020 and then sharply increased to a high of 16.45% in 2021. In 2022, ROA declined to 11.19%, which, while lower than the peak, remained significantly above the levels recorded at the beginning of the period. This pattern suggests that the company’s overall asset profitability improved substantially in 2021 before moderating somewhat in the following year.
Four-Component Disaggregation of ROA
Northrop Grumman Corp., decomposition of ROA
Based on: 10-K (reporting date: 2022-12-31), 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).
- Tax Burden
- The tax burden ratio remained relatively stable over the five-year period, fluctuating within a narrow range from 0.78 to 0.88. The highest tax burden was observed in 2019 at 0.88, while the lowest occurred in 2021 at 0.78, indicating a slight reduction in effective tax costs during that year before returning closer to previous levels in 2022.
- Interest Burden
- The interest burden ratio showed some variability, with a decrease from 0.87 in 2018 to 0.83 in 2019, followed by a recovery to 0.86 in 2020. A notable improvement occurred in 2021, reaching 0.94, reflecting a reduced interest expense relative to earnings before interest and taxes. The ratio slightly decreased again to 0.92 in 2022 but remained higher than the initial years, suggesting improved management of interest costs over time.
- EBIT Margin
- There was significant volatility in the EBIT margin throughout the period. It declined sharply from 14.3% in 2018 to 9.09% in 2019, followed by a moderate recovery to 11.74% in 2020. A substantial increase was recorded in 2021, peaking at 26.62%, more than doubling the margin from the previous year. However, the margin decreased to 17.33% in 2022, still remaining well above the margins observed before 2021. This trend indicates periods of fluctuating operational profitability, with a pronounced peak in 2021.
- Asset Turnover
- The asset turnover ratio exhibited a stable and gradual increase from 0.8 in 2018 to 0.84 in 2021, maintaining the same level in 2022. This steady improvement suggests consistent growth in the efficiency of asset utilization for generating revenue over the years.
- Return on Assets (ROA)
- The ROA followed a pattern similar to the EBIT margin, with a decline from 8.58% in 2018 to 5.47% in 2019, then recovering to 7.17% in 2020. A marked increase occurred in 2021, elevating ROA to 16.45%, before it declined to 11.19% in 2022. Despite the drop in the final year, the ROA remained significantly higher compared to the initial years, reflecting improved overall asset profitability driven by enhanced operational efficiency and cost management during the peak period.
Disaggregation of Net Profit Margin
Northrop Grumman Corp., decomposition of net profit margin ratio
Based on: 10-K (reporting date: 2022-12-31), 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).
- Tax Burden
- The tax burden ratio exhibited slight fluctuations over the five-year period, starting at 0.86 in 2018 and peaking at 0.88 in 2019. It declined to a low of 0.78 in 2021 before recovering somewhat to 0.84 in 2022. This indicates variable tax efficiency, with some volatility but generally remaining below 1, denoting a consistent tax impact on pre-tax profits.
- Interest Burden
- The interest burden ratio showed moderate variation, decreasing from 0.87 in 2018 to 0.83 in 2019, followed by a recovery to 0.86 in 2020. Notably, it increased in 2021 to 0.94 and remained relatively stable at 0.92 in 2022. This suggests fluctuations in interest expenses relative to EBIT, with a trend toward lower interest burden in the latter years, implying improved interest expense management or lower leverage costs.
- EBIT Margin
- The EBIT margin displayed significant volatility. It began at 14.3% in 2018, dropped noticeably to 9.09% in 2019, then rebounded moderately to 11.74% in 2020. A sharp increase occurred in 2021, reaching 26.62%, before declining again to 17.33% in 2022. The sharp spike in 2021 suggests extraordinary operational performance or non-recurring factors positively impacting EBIT for that year, followed by normalization in 2022.
- Net Profit Margin
- The net profit margin mirrored the EBIT margin's volatility, starting at 10.73% in 2018, decreasing to 6.64% in 2019, then recovering to 8.67% in 2020. A substantial increase to 19.64% was observed in 2021, followed by a decrease to 13.38% in 2022. This pattern further indicates that 2021 was an exceptional year in terms of profitability, with margins significantly higher than in other years, suggesting either one-time gains or operational efficiencies that were not sustained at the same level in 2022.