Financial Calculations & Valuation Beginner

Automated 3-Step & 5-Step DuPont ROE Decomposition Analysis in Python

Break down Return on Equity (ROE) into Tax Burden, Interest Burden, Operating Margin, Asset Turnover, and Financial Leverage in Python Pandas.

#pandas#numpy

Problem Statement

A high Return on Equity (ROE) can be artificially inflated by dangerous debt leverage rather than operational efficiency. 5-Factor DuPont analysis isolates the exact driver of ROE.

Formula / Core Logic

ROE = (Net_Income / EBT) * (EBT / EBIT) * (EBIT / Sales) * (Sales / Assets) * (Assets / Equity)

Installation

pip install pandas numpy

dupont-roe-5-factor-decomposition-python.py

import pandas as pd

def dupont_5_step(df):
    # Expected cols: Net_Income, EBT, EBIT, Revenue, Total_Assets, Total_Equity
    out = pd.DataFrame(index=df.index)
    out['Tax_Burden'] = (df['Net_Income'] / df['EBT']).round(3)
    out['Interest_Burden'] = (df['EBT'] / df['EBIT']).round(3)
    out['EBIT_Margin_Pct'] = ((df['EBIT'] / df['Revenue']) * 100).round(2)
    out['Asset_Turnover'] = (df['Revenue'] / df['Total_Assets']).round(2)
    out['Equity_Multiplier'] = (df['Total_Assets'] / df['Total_Equity']).round(2)
    out['DuPont_ROE_Pct'] = ((df['Net_Income'] / df['Total_Equity']) * 100).round(2)
    return out

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Frequently Asked Questions

Q: What indicates high-quality ROE in DuPont analysis?

ROE driven by rising EBIT Margin and Asset Turnover rather than an expanding Equity Multiplier (debt leverage).