biz-dupont

# DuPont Analysis

## Overview

DuPont decomposes ROE into three multiplicative components: Net Profit Margin × Asset Turnover × Equity Multiplier. This reveals whether ROE is driven by profitability, efficiency, or leverage — critical for diagnosis and comparison.

## When to Use

**Trigger conditions:**
- User asks "why is our ROE high/low?"
- User comparing financial performance across companies
- User needs to identify which operational lever improves returns
- User analyzing profitability beyond top-line metrics

**When NOT to use:**
- For company valuation → use DCF
- For comprehensive ratio analysis → use Financial Ratios skill
- For strategic positioning → use SWOT

## Framework

```
IRON LAW: Three-Factor Decomposition

ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
    = (Net Income/Revenue) × (Revenue/Total Assets) × (Total Assets/Equity)

All three factors MUST be calculated and analyzed. Reporting ROE without
decomposition is like reporting a fever without checking symptoms.
```

```
IRON LAW: High Leverage ≠ Good Performance

A high Equity Multiplier (Assets/Equity) inflates ROE through debt.
A company with 5% margin, 1.0x turnover, and 6x leverage has ROE of 30% —
but is one bad quarter away from insolvency. Always flag when leverage
is the dominant driver.
```

### Step 1: Calculate the Three Components

| Component | Formula | What It Measures |
|-----------|---------|-----------------|
| Net Profit Margin | Net Income / Revenue | Profitability — how much of each dollar of revenue becomes profit |
| Asset Turnover | Revenue / Total Assets | Efficiency — how well assets generate revenue |
| Equity Multiplier | Total Assets / Shareholders' Equity | Leverage — how much debt amplifies equity returns |

### Step 2: Diagnose the Driver

Compare each component to industry benchmarks and trends:
- **Margin-driven ROE**: Premium brands, tech companies (high margin, lower turnover)
- **Turnover-driven ROE**: Retail, fast food (low margin, high turnover)
- **Leverage-driven ROE**: Banks, real estate (moderate margin, high leverage) — flag the risk

### Step 3: Trend Analysis

Calculate DuPont components for 3-5 years. Identify:
- Which component is improving/declining?
- Is improving ROE driven by operations (margin, turnover) or financial engineering (leverage)?

### Step 4: Peer Comparison

Compare DuPont components across competitors to identify relative strengths/weaknesses.

## Output Format

> ⚠️ **Decimal vs percent**: The bundled script returns ROE and all margin/burden
> components as **decimals** (`0.2014` means 20.14%, NOT `20.14`). The narrative
> table below renders them as percentages for humans, but JSON outputs and any
> downstream pipeline must use decimals consistently.

```markdown
# DuPont Analysis: {Company}

## ROE Decomposition

| Component | Value | Industry Avg | Trend (3yr) |
|-----------|-------|-------------|-------------|
| Net Profit Margin | X% | X% | ↑/↓/→ |
| Asset Turnover | X.Xx | X.Xx | ↑/↓/→ |
| Equity Multiplier | X.Xx | X.Xx | ↑/↓/→ |
| **ROE** | **X%** | **X%** | ↑/↓/→ |

## Diagnosis
- Primary ROE driver: {margin / turnover / leverage}
- Risk flag: {leverage concern if applicable}

## Peer Comparison
| Company | Margin | Turnover | Leverage | ROE |
|---------|--------|----------|----------|-----|
| {Company} | X% | X.Xx | X.Xx | X% |
| {Peer A} | ... | ... | ... | ... |

## Recommendations
1. {Which lever to improve and how}
```

## Examples

### Correct Application
**Scenario:** DuPont for two Taiwanese retailers

| | Company A | Company B |
|---|---|---|
| Net Profit Margin | 2% | 8% |
| Asset Turnover | 3.5x | 1.2x |
| Equity Multiplier | 2.0x | 2.0x |
| **ROE** | **14%** | **19.2%** |

Diagnosis: Company A is turnover-driven (high-volume, low-margin retail). Company B is margin-driven (premium positioning). Both have similar leverage — ROE difference comes from operations ✓

### Incorrect Application
- ROE is 25% and reported as "excellent" without decomposition. Turns out: Margin 3%, Turnover 1.0x, Leverage 8.3x → Almost entirely leverage-driven, extremely risky. Violates Iron Law: must decompose.

## Gotchas

- **Extended 5-factor DuPont**: For deeper analysis, decompose margin into Tax Burden × Interest Burden × Operating Margin. Useful when comparing across tax jurisdictions.
- **Negative equity breaks the model**: Companies with accumulated losses can have negative equity, making the multiplier meaningless. Note and use alternative metrics.
- **One-time items distort margin**: Use normalized/adjusted net income to avoid single-year spikes from asset sales, write-downs, or legal settlements.
- **Turnover varies wildly by industry**: Asset-light businesses (SaaS) have naturally high turnover. Capital-heavy businesses (manufacturing) have low turnover. Compare within industry only.

## Scripts

| Script | Description | Usage |
|--------|-------------|-------|
| `scripts/dupont.py` | Decompose ROE into 3-factor or 5-factor DuPont components | `python scripts/dupont.py --help` |

Run `python scripts/dupont.py --verify` to execute built-in sanity tests.

## References

- For 5-factor DuPont extension, see `references/extended-dupont.md`