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Chapter 5

Return on Equity. Chapter 5. Direct Calculation. Return on Equity =. ROE = Net Profit Margin X Asset Turnover X Financial Leverage Net Profit Margin: Measures how much of every sales dollar is turned into profit. (how much does a company make on each dollar of sales?)

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Chapter 5

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  1. Return on Equity Chapter 5

  2. Direct Calculation Return on Equity =

  3. ROE = Net Profit Margin X Asset Turnover X Financial Leverage Net Profit Margin: Measures how much of every sales dollar is turned into profit. (how much does a company make on each dollar of sales?) Asset Turnover: Measures how many sales dollars the company generates with each dollar of assets. (efficiency in turning assets into sales) Financial Leverage: Measures how many dollars of assets are employed for each dollar of stockholder investment (higher value means more debt financed assets). Breakdown of ROE

  4. Net Profit Margin

  5. Asset Turnover

  6. ROI = Net Profit Margin X Asset Turnover Return on Investment (ROI)

  7. ROE = ROI X Financial Leverage ROI and Financial Leverage

  8. Do E5-16 and E5-17 Calculate: ROE and all components of ROE What do the ratios say about the strategy of the companies.

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