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. The DuPont Method can be used to calculate this. It takes three important components into consideration: the net income margin (net profit), asset turnover, and financial leverage ratio. To analyze ROE in the past two-year period, it is necessary to first determine these numbers.
Asset turnover measures how effectively the company uses its assets in order to generate profits. The financial leverage ratio measures the proportion of assets that are funded by equity versus 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 is important to make sure that the management team makes good decisions regarding how they leverage their resources, while creating value over time for shareholders.