Fin 571 week 3 financial statement interpretation
Return on Equity (ROE) is a measure of how much profit a company generates from its shareholder’s equity. This can be calculated using the DuPont method, which takes into account three key components: net income margin, asset turnover and financial leverage ratio. In order to analyze ROE for the last two years, these figures must first be determined.
The net income margin looks at the amount of profit generated in relation to total sales or revenues while asset turnover examines how efficiently the firm utilizes its assets to produce profits. Finally, the financial leverage ratio shows what proportion of total assets are financed by debt as opposed to equity.
By combining all three metrics one can calculate a company’s return on equity which can then be compared against industry averages or other companies in order identify areas that require improvement. Doing so helps ensure that management is making sound decisions when it comes to leveraging their resources while also creating value for shareholders over time.