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.
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- Statement of Comprehensive Income
- Common-Size Balance Sheet: Liabilities and Stockholders’ Equity
- Analysis of Solvency Ratios
- Analysis of Reportable Segments
- Price to FCFE (P/FCFE)
- Present Value of Free Cash Flow to Equity (FCFE)
- Operating Profit Margin since 2005
- Price to Operating Profit (P/OP) since 2005
- Price to Book Value (P/BV) since 2005
- Aggregate Accruals
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Two-Component Disaggregation of ROE
Trane Technologies plc, decomposition of ROE
| ROE | = | ROA | × | Financial Leverage | |
|---|---|---|---|---|---|
| Dec 31, 2022 | = | × | |||
| Dec 31, 2021 | = | × | |||
| Dec 31, 2020 | = | × | |||
| Dec 31, 2019 | = | × | |||
| Dec 31, 2018 | = | × |
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 between 2018 and 2022. It initially decreased from 7.47% in 2018 to 4.71% in 2020, indicating a decline in asset profitability during this period. Following 2020, the ROA improved progressively, rising to 7.88% in 2021 and further to 9.71% in 2022. This recovery suggests enhanced efficiency in asset utilization toward the end of the analyzed period.
- Financial Leverage
- Financial leverage showed a consistent upward trend across the years. Starting at a ratio of 2.55 in 2018, it steadily increased each year, reaching 2.97 in 2022. The incremental rise suggests a gradual increase in the use of debt relative to equity, indicating a shift toward greater leverage in the company’s capital structure.
- Return on Equity (ROE)
- The Return on Equity followed a pattern with significant variation over the period. It began at 19.05% in 2018, slightly increased to 19.41% in 2019, then dropped considerably to 13.34% in 2020. Subsequent years saw a robust recovery with ROE climbing to 22.75% in 2021 and reaching a peak of 28.85% in 2022. This suggests improved profitability and effective use of shareholder equity in the latter years.
- Overall Insights
- The analysis reveals that despite some setbacks during 2020, possibly related to external or operational challenges, the company managed to enhance its profitability metrics significantly in 2021 and 2022. The simultaneous increase in financial leverage and ROE indicates that the company may have effectively employed higher debt to finance growth or operations, resulting in increased returns to equity holders. The improvement in ROA corroborates a more efficient use of assets in the same timeframe.
Three-Component Disaggregation of ROE
Trane Technologies plc, decomposition of ROE
| ROE | = | Net Profit Margin | × | Asset Turnover | × | Financial Leverage | |
|---|---|---|---|---|---|---|---|
| Dec 31, 2022 | = | × | × | ||||
| Dec 31, 2021 | = | × | × | ||||
| Dec 31, 2020 | = | × | × | ||||
| Dec 31, 2019 | = | × | × | ||||
| Dec 31, 2018 | = | × | × |
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 a slight decline from 8.54% in 2018 to 6.86% in 2020, indicating reduced profitability relative to revenue during this period. However, it recovered significantly in the subsequent years, rising to 10.07% in 2021 and further improving to 10.98% in 2022, surpassing the initial 2018 level.
- Asset Turnover
- The asset turnover ratio showed a downward trend from 0.87 in 2018 to its lowest point of 0.69 in 2020, suggesting decreasing efficiency in using assets to generate sales. It rebounded to 0.78 in 2021 and increased further to 0.88 in 2022, indicating improved asset utilization approaching or slightly surpassing the initial ratio seen in 2018.
- Financial Leverage
- Financial leverage steadily increased over the five-year span, starting from 2.55 in 2018 and rising to 2.97 in 2022. This trend implies an increasing use of debt relative to equity in the company's capital structure, potentially amplifying both risk and return dynamics.
- Return on Equity (ROE)
- Return on equity exhibited variability with an initial increase from 19.05% in 2018 to 19.41% in 2019, followed by a notable decline to 13.34% in 2020. Thereafter, ROE surged markedly to 22.75% in 2021 and continued to rise to 28.85% in 2022. The rise aligns with improved net profit margins and a modest recovery in asset turnover, compounded by increased financial leverage.
Five-Component Disaggregation of ROE
Trane Technologies plc, 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 exhibited a declining trend from 0.83 in 2018 to 0.74 in 2020, indicating a reduction in the proportion of earnings retained after tax. However, this ratio increased again to 0.82 by 2022, approaching the initial level observed in 2018. This pattern suggests fluctuating tax efficiency or varying tax-related circumstances over the analyzed period.
- Interest Burden
- The interest burden ratio remained relatively stable between 0.88 and 0.91 throughout the years, with a slight dip to 0.82 in 2020. The increase to 0.91 in 2022 indicates somewhat higher profitability before interest expenses in recent years, following a temporary decrease in 2020.
- EBIT Margin
- The EBIT margin demonstrated a positive trend overall, increasing from 11.74% in 2018 to 14.73% in 2022. The margin dipped slightly in 2020 to 11.24%, possibly due to adverse conditions in that year, but showed strong recovery and growth thereafter, suggesting improving operational profitability.
- Asset Turnover
- Asset turnover declined notably from 0.87 in 2018 to 0.69 in 2020, indicating reduced efficiency in using assets to generate sales during that period. Improvements were seen in 2021 and 2022, with the ratio rising back to 0.88, reflecting enhanced asset utilization in the most recent years analyzed.
- Financial Leverage
- Financial leverage steadily increased from 2.55 in 2018 to 2.97 in 2022. This rising trend points to greater use of debt or other financial obligations relative to equity, potentially amplifying both risk and return associated with the company’s capital structure.
- Return on Equity (ROE)
- The ROE showed significant variability, starting at 19.05% in 2018, peaking at 28.85% in 2022, but falling sharply to 13.34% in 2020. The substantial recovery after 2020 indicates enhanced shareholder value creation, likely driven by improved profitability, better asset utilization, and increased financial leverage.
Two-Component Disaggregation of ROA
Trane Technologies plc, decomposition of ROA
| ROA | = | Net Profit Margin | × | Asset Turnover | |
|---|---|---|---|---|---|
| Dec 31, 2022 | = | × | |||
| Dec 31, 2021 | = | × | |||
| Dec 31, 2020 | = | × | |||
| Dec 31, 2019 | = | × | |||
| Dec 31, 2018 | = | × |
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 shows a generally positive trend over the five-year period. Beginning at 8.54% in 2018, it experiences a slight dip to 8.5% in 2019, followed by a more noticeable decline to 6.86% in 2020. However, this is followed by a substantial recovery and growth, reaching 10.07% in 2021 and further increasing to 10.98% in 2022. The overall pattern suggests resilience and improving profitability, particularly post-2020.
- Asset Turnover
- The asset turnover ratio demonstrates variability with a downward trend up to 2020, starting at 0.87 in 2018 and decreasing to 0.81 in 2019, then further declining to 0.69 in 2020. This indicates a reduction in the efficiency of asset use to generate revenue during these years. Thereafter, the ratio rebounds to 0.78 in 2021 and improves significantly to 0.88 in 2022, slightly surpassing the 2018 level. This recovery implies enhanced operational efficiency in the latter years.
- Return on Assets (ROA)
- The return on assets follows a trend similar to that of the net profit margin and asset turnover. The ROA decreases from 7.47% in 2018 to 6.89% in 2019 and then more sharply to 4.71% in 2020. This decline points to diminished overall profitability relative to total assets in that period. Nevertheless, the ROA shows significant improvement from 2021 onward, rising to 7.88% and reaching 9.71% in 2022, signaling a strong recovery and enhanced asset utilization in generating profits.
- Summary
- Collectively, the data indicates a period of reduced profitability and operational efficiency in 2019 and 2020, likely reflecting challenges faced during that time. Despite this, the subsequent years demonstrate a notable turnaround, with improvements in net profit margin, asset turnover, and return on assets, culminating in 2022's figures exceeding or nearing the levels observed at the beginning of the period. This suggests a successful recovery and strengthening of financial performance towards the end of the analyzed timeframe.
Four-Component Disaggregation of ROA
Trane Technologies plc, decomposition of ROA
| ROA | = | Tax Burden | × | Interest Burden | × | EBIT Margin | × | Asset Turnover | |
|---|---|---|---|---|---|---|---|---|---|
| Dec 31, 2022 | = | × | × | × | |||||
| Dec 31, 2021 | = | × | × | × | |||||
| Dec 31, 2020 | = | × | × | × | |||||
| Dec 31, 2019 | = | × | × | × | |||||
| Dec 31, 2018 | = | × | × | × |
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 shows a general decline from 0.83 in 2018 to a low of 0.74 in 2020, followed by a recovery to 0.82 in 2022. This indicates a period of reduced tax impact in 2020, with subsequent stabilization near the initial levels.
- Interest Burden
- Interest burden remained relatively stable around 0.88 in 2018 and 2019, dipped to 0.82 in 2020, and then rose steadily to 0.91 by 2022. The increase towards the end of the period suggests improved management of interest expenses or favorable debt conditions.
- EBIT Margin
- The EBIT margin experienced moderate fluctuations. It increased from 11.74% in 2018 to 12.09% in 2019, declined to 11.24% in 2020, and then showed a notable improvement to 14.73% by 2022. This reflects an overall strengthening in operating profitability, especially after 2020.
- Asset Turnover
- Asset turnover decreased from 0.87 in 2018 to a low of 0.69 in 2020, indicating less efficient use of assets during this period. It gradually recovered to 0.88 in 2022, reaching a level slightly above the initial value, suggesting an improvement in asset utilization.
- Return on Assets (ROA)
- ROA diminished from 7.47% in 2018 to 4.71% in 2020, showing reduced overall asset profitability. However, it rebounded strongly thereafter, reaching 9.71% in 2022, the highest in the five-year span. This recovery is consistent with improved EBIT margin and asset turnover, signaling enhanced operational efficiency and profitability.
Disaggregation of Net Profit Margin
Trane Technologies plc, decomposition of net profit margin ratio
| Net Profit Margin | = | Tax Burden | × | Interest Burden | × | EBIT Margin | |
|---|---|---|---|---|---|---|---|
| Dec 31, 2022 | = | × | × | ||||
| Dec 31, 2021 | = | × | × | ||||
| Dec 31, 2020 | = | × | × | ||||
| Dec 31, 2019 | = | × | × | ||||
| Dec 31, 2018 | = | × | × |
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 a declining trend from 0.83 in 2018 to a low of 0.74 in 2020, indicating a reduction in the proportion of earnings paid as tax. Subsequently, the ratio increased to 0.81 in 2021 and slightly to 0.82 in 2022, suggesting a partial reversal but remaining below the initial 2018 level.
- Interest Burden
- The interest burden ratio remained relatively stable over the period, starting at 0.88 in 2018 and 2019, dipping to 0.82 in 2020, and then rising again to 0.88 in 2021 and further to 0.91 in 2022. This shows a minor fluctuation with a slight increase by the end of the period, indicating a potential increase in earnings retention after interest payments.
- EBIT Margin
- The EBIT margin percentage demonstrated an overall upward trend. Beginning at 11.74% in 2018, it increased marginally to 12.09% in 2019, dipped slightly to 11.24% in 2020, then rose significantly to 14.08% in 2021, and continued improving to 14.73% in 2022. This suggests improving operational efficiency and profitability from core business activities over the final two years.
- Net Profit Margin
- The net profit margin showed greater variability. It was relatively steady at 8.54% in 2018 and 8.5% in 2019, but then declined to 6.86% in 2020. This was followed by a notable recovery to 10.07% in 2021 and further increase to 10.98% in 2022. The improvement in the last two years surpasses earlier levels, indicating enhanced overall profitability potentially due to better cost control, improved operational performance, or favorable tax and interest burdens.