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. It can be calculated by the DuPont Method, which considers three important components: net margin, asset turnover, and financial leverage ratio. This information is necessary in order to calculate ROE.
Net income margin measures the profit that is generated relative to sales and revenues. Asset turnover measures how efficient the company’s assets are used to generate profits. Final, the financial leverage ratio measures how much of total assets is funded by equity and debt.
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. It helps management make sound decisions about how to leverage their resources, while creating long-term value for shareholders.