How to Easily Memorize the DuPont Analysis Formulas - YouTube

ROE or Return on Equity is computed as net  income divided by average shareholders' equity.  

To know what makes the ROE increase or decrease,  we need to decompose the ROE. This decomposition  

is what we call DuPont analysis. Looking at the  DuPont analysis formulas, it seems difficult to  

remember. Well, don't worry. This video will  tell you the tricks or techniques on how to  

easily memorize the DoPunt analysis formulas.  Stay tuned and watch the video till the very end.  

ROE can be expressed in two components using  mnemonic rem or REM. R is ROA or return on assets  

while EM stands for equity multiplier. Therefore,  we have two fractions or components. To easily  

memorize the formula, just remember these two very  simple tricks. The first trick is start with net  

income and ends with average shareholders'  equity. This means that the first component  

should have net income as numerator and the last  component should have average shareholders' equity  

as denominator. For the first component return  on assets, what would be the denominator? If  

you remember the video "How to easily memorize  the financial ratios", it says that ratio that  

starts with the word "return" the denominator is  the average of the last word of ratio name. The  

link of that video is in the description below or  click the card above. Since we are talking about  

return on assets, the denominator is average total  assets. Next we will apply the second trick which  

is the denominator of a certain component will  become numerator of the next component. Therefore,  

the next component will have average total  assets as numerator. When we do elimination,  

the final result will be net income over average  shareholders' equity the original formula of ROE.  

So this is our formula for two-way decomposition  of ROE. Now how about the three-way decomposition  

of ROE? This can be done by decomposing the return  on assets into two components and bringing down  

the equity multiplier. We can use the mnemonic  NATEM. N stands for net profit margin. AT means  

asset turnover and EM for equity multiplier.  Applying the first trick we already comply with  

the rule that the formula should ends with average  shareholders' equity. We need to add net income as  

numerator in the first component. Now we will  apply the second trick which is the denominator  

of a certain component will become numerator of  the next component. Since equity multiplier has  

numerator of average total assets, it means the  second component will have denominator of average  

total assets. Now how about the first component  called net profit margin? If you watch the video  

"How to easily memorize the financial ratios"  it says that ratio that ends with word "margin"  

the denominator is sales or revenue. So  denominator of net profit margin is revenue.  

Applying the second trick, revenue as denominator  will become numerator of the next component. How  

we will know that this formula is correct? Doing  elimination, we end up with original ROE formula  

of net income over average shareholders' equity.  So this is our formula of 3-way decomposition  

of ROE. Now let's go to 5-way decomposition  of ROE. This can be done by decomposing net  

profit margin into three components. We can use  mnemonic TIE or tie. T stands for tax burden.  

I for interest burden and E is for EBIT margin.  Bring down the last two formulas of asset turnover  

and equity multiplier. Applying the first trick  then you have this incomplete formulas. Let's use  

again the second trick. The numerator of asset  turnover of revenue is also the denominator of  

prior component of EBIT margin. According  to the video "How to easily memorize the  

financial ratios" ratio that ends with the word  "margin" the numerator is the name of the ratio.  

So numerator the third component is EBIT or  earnings before interest and taxes. Applying  

the second trick, EBIT should be the denominator  of the second component called interest burden.  

The first component has denominator of EBT or  earnings before tax. Applying the second trick  

this denominator will become numerator of the  next component. Eliminating EBT, EBIT, revenue  

and average total assets will result to the  original formula of ROE of net income over average  

shareholders' equity. So this is our formula of  5-way decomposition of ROE. So that's it. I hope  

these techniques are great helps in acing your  exams. Good luck and wish you all the success.  

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