Using Disaggregated Return on Assets to Conduct a Financial Analysis of a Commercial Bank Using an Extension of the DuPont System of Financial Analysis

Abstract

In this paper, we use an expanded version of the DuPont system of financial analysis to perform a financial analysis of a bank using disaggregated data to computer return on assets. The DuPont system of financial analysis is based on return on equity which is based on net profit margin, total asset turnover, and the equity multiplier. We further disaggregate net profit margin into three components:  return on loans, return on securities, and return on other assets using supplementary data provided in the SEC filings of Monarch Bank. The analysis covers the period from 2003 to 2010.  Our analysis demonstrates that return on assets for Monarch Bank derives primarily from return on loans.  That is, 86% of the investment weighted return on assets for Monarch Bank derives from return on loans.