DuPont Decomposition

Install and import#

bash

npm install fintech-algorithms

import { dupontDecomposition } from "fintech-algorithms/fundamental-analysis-and-valuation/statement-ratios/dupont-decomposition";

Signature#

dupontDecomposition(input)

Splits return on equity into net profit margin, asset turnover and equity multiplier, using period-average assets and equity as the denominators, and reports the gap between the three-factor product and return on equity taken directly as net_income / average_equity.

Parameters#

Name	Type	Notes
`input`	`{ net_income: number; revenue: number; beginning_assets: number; ending_assets: number; beginning_equity: number; ending_equity: number }`	A plain object. Six keys are read and each must be a finite number: `net_income` and `revenue` form the margin, `beginning_assets` and `ending_assets` are averaged into the turnover denominator, and `beginning_equity` and `ending_equity` are averaged into the equity base.

Returns#

{ net_profit_margin: number | null; asset_turnover: number | null; equity_multiplier: number | null; dupont_roe: number | null; direct_roe: number | null; identity_gap: number | null; average_assets: number; average_equity: number; state: string; reason: string }

net_profit_margin, asset_turnover and equity_multiplier multiply to dupont_roe; direct_roe divides net income by average equity and identity_gap is the difference between the two. average_assets and average_equity are always emitted. state is calculated, or loss when net income is negative, or not-meaningful when revenue is zero or either average is not positive — in that case the six ratio keys are null and reason joins the offending conditions with +, otherwise reason is three-factor-identity-reconciles.

Errors#

When any of the six inputs is not a finite number — throws RangeError

Complexity: time O(1), space O(1).

Worked example#

verified This is the worked example published in the article, replayed by the test suite on every run. The output cannot drift.

Input#

input

{
  "net_income": 96,
  "revenue": 1200,
  "beginning_assets": 900,
  "ending_assets": 1100,
  "beginning_equity": 380,
  "ending_equity": 420
}

Call#

dupontDecomposition(input)

Returns#

object with 10 fields: net_profit_margin, asset_turnover, equity_multiplier, dupont_roe, direct_roe, identity_gap, average_assets, average_equity, …

{
  "net_profit_margin": 0.08,
  "asset_turnover": 1.2,
  "equity_multiplier": 2.5,
  "dupont_roe": 0.24,
  "direct_roe": 0.24,
  "identity_gap": 0,
  "average_assets": 1000,
  "average_equity": 400,
  "state": "calculated",
  "reason": "three-factor-identity-reconciles"
}

Other exports#

This module also exports roicCalculation, cashConversionCycle, interestCoverageRatio, netDebtToEbitda, commonSizeStatements, calculate. Every module additionally exports run as an alias of its primary function, and a meta object carrying its catalog id, domain, family, shape and article URL.