Disintegrating Return on Equity Using the DuPont Model : A Case Study of Tata Steel Ltd

All are aware of the fact that Return on Equity (ROE) is equal to Profit After Tax (PAT) divided by Owners' Equity. But, ROE represented by a single number begs more questions than it can answer. Such a singularity cannot take us far away to understand the complexity arising out of the interplay of different variables in its construction and therefore, it is necessary to understand and explore the impact of different associated variables in making this magic figure. To do this, simply, we need to deconstruct the singularity of ROE and to explore its plural affiliations. The DuPont model serves as one of the most efficient tools till today that helps the investors and financial analysts to have an overview of the different aspects such as profitability, capital structure, leverage, operational efficiency etc. of a firm. Five-step model decomposes the Return on Equity (ROE) into five parts (independent variables) such as Net Profit Margin (NPM), Asset Multiplier, Equity Multiplier, Interest Burden Ratio (IBR) and Tax Burden Ratio (TBR). The present study is an effort to analyze the impact of these independent variables on ROE of the Tata Steel Ltd through correlation and regression analysis covering a time period of 15 years from 1996-97 to 2010-11. Result shows significant correlation between ROE and the independent variables. Furthermore the linear regression analysis shows significance dependency of ROE on respective explanatory variables