Step 1. State the ROE decomposition (DuPont) - 3‑step DuPont: ROE = Profit Margin × Asset Turnover × Financial Leverage where Profit Margin = Net income / Sales Asset Turnover = Sales / Total assets Financial Leverage (equity multiplier) = Total assets / Equity. The table you provided already lists the three DuPont components (Profit Margin, Asset Turnover, Financial Leverage) as well as the reported ROE, so we can evaluate the drivers directly. Step 2. Read the inputs (BP PLC) Key lines from the table (percent signs omitted in the source): - Profit margin: 2016: 0.06 | 2017: 1.41 | 2018: 3.14 | 2019: 1.45 | LTM Sep‑20: −10.47 | 2020E: −2.01 | 2021E: 2.16 - Return on common equity (ROE): 2016: 0.12 | 2017: 5.70 | 2018: 9.28 | 2019: 4.07 | LTM Sep‑20: −26.31 | 2020E: −4.23 | 2021E: 6.52 - Total Debt/Equity (to gauge leverage trend): 2016: 80.2 | 2017: 62.98 | 2018: 64.80 | 2019: 76.90 | LTM Sep‑20: 99.92 - Other context: Revenue fell sharply in 2020 LTM; inventory days rose; interest coverage turned negative; large impairments drove an extreme effective tax rate in LTM (loss year). Step 3. Back out the combined “operating × leverage” multiplier Because ROE = Margin × (Asset Turnover × Financial Leverage), we can see how powerful the non‑margin drivers are by dividing ROE by margin. Compute the multiplier M = ROE / Profit margin - 2016: 0.12 / 0.06 ≈ 2.0 - 2017: 5.70 / 1.41 ≈ 4.04 - 2018: 9.28 / 3.14 ≈ 2.96 - 2019: 4.07 / 1.45 ≈ 2.81 - LTM Sep‑20: −26.31 / −10.47 ≈ 2.51 - 2020E: −4.23 / −2.01 ≈ 2.10 - 2021E: 6.52 / 2.16 ≈ 3.02 Interpretation: most of the big swing in ROE is explained by the profit margin; the “throughput plus leverage” multiplier stayed in a 2–4× band. Step 4. Discuss each DuPont driver A) Profit Margin (primary driver) - Recovery phase 2016→2018: margin improved from almost breakeven (0.06%) to 3.14% as oil prices and refining/marketing conditions recovered; this pushed ROE up to 9.3%. - 2019 cooling: margin slipped to 1.45% with softer commodity prices; ROE fell accordingly to 4.1%. - Crisis 2020: margin collapsed to −10.5% LTM on the back of COVID‑19 demand shock, oil price crash (including the brief price war), and very large impairments. That single line item explains the plunge in ROE to −26%. - Outlook: 2020E still negative (−2.0% margin, −4.2% ROE); 2021E shows a modest margin rebound to 2.16% and ROE to 6.5% as prices/volumes normalize and cost cuts flow through. B) Asset Turnover (throughput) - Although exact figures are not printed on your screenshot, the implied multiplier together with the revenue line shows that turnover rose into 2018 (higher volumes/prices), then fell in 2019 and collapsed in 2020 with the revenue shock while the asset base (especially PPE) could not shrink as fast. Inventory days increased in LTM (to roughly mid‑30s), signaling slower movement of barrels/products. - Lower turnover since 2019 has been a secondary headwind to ROE. C) Financial Leverage (equity multiplier) - Total Debt/Equity rose from about 63–77 (2017–2019) to about 100 in LTM 2020 as equity fell (losses/impairments) and gross debt rose (new borrowing to shore up liquidity). Net debt also increased. - Higher leverage would normally amplify ROE, but in 2020 it amplified losses instead. Interest coverage turned negative in LTM, highlighting the cost of the higher leverage. - Management response is visible in the table: capex cut, dividend reduced/rebased, planned asset disposals, which should help delever in 2021E. Step 5. Tie back to reported ROE - 2016→2018: Rising margin and slightly better turnover lifted ROE from near zero to 9.28% despite leverage being broadly stable to slightly lower versus 2016. - 2019: Margin softened; ROE halved to 4.07%. - 2020 LTM: Margin turned deeply negative; turnover fell; leverage increased—resulting in −26% ROE. - 2021E: Partial rebound in margin and turnover with still‑elevated leverage ⇒ ROE recovers to ~6.5%, still below the 2018 peak. Step 6. Trend you can identify - A cyclical pattern tied to commodity prices: - Post‑2016 recovery into 2018, - slowdown in 2019, - severe 2020 trough with historically weak margins and utilization, - modeled recovery in 2021 but not yet back to prior highs. - Structurally, leverage crept higher into the crisis (Debt/Equity near 100 in LTM), so the capital structure risk increased. Step 7. Expected effect of the current crisis on the financial statements Income statement - Lower revenue/realizations and volumes; negative operating and net margins in 2020. - Large impairment charges on upstream assets; these turned the effective tax rate extreme (loss year) and pushed ROE deeply negative. - Interest burden higher due to more debt; net interest coverage negative in LTM. Balance sheet - PPE and intangible assets reduced by impairments; equity reduced by losses, which mechanically raises leverage ratios. - Net debt increased in LTM; Debt/Equity rose to ~100. - Working capital mixed: inventory days up, payables days broadly stable; current and quick ratios improved somewhat because of liquidity raised (cash buffers), but that came with more debt. Cash flow - CFO weakened with lower margins but was partially supported by working‑capital releases and non‑cash impairment addbacks. - Capex cut materially in 2020 and kept tight into 2021E. - Dividends reduced/rebased to conserve cash. - Financing cash flows positive in 2020 due to new debt issuance; management targets deleveraging via capex discipline and asset sales as conditions normalize. Bottom line (final answer) - ROE decomposition shows that BP’s ROE is driven primarily by profit margin swings, with asset turnover providing a smaller cyclical boost/draw and leverage acting as an amplifier. - The trend over the period is: recovery (2016–2018) → softening (2019) → crisis‑driven collapse (2020 LTM) → partial recovery in 2021E. - The current crisis depresses the income statement (negative margins, impairments), shrinks equity and raises leverage on the balance sheet, and forces a shift in cash‑flow allocation (lower capex, rebased dividends, more financing in 2020 followed by planned deleveraging). If the 2021 recovery materializes, margins and turnover should improve and ROE could normalize toward mid‑single digits first, but sustained ROE near the 2018 peak would require stronger commodity prices and continued balance‑sheet repair.