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Unformatted text preview: profit margin and asset
turnover. Profitability: Return on assets (3)
● ROA = Profit margin X Assets turnover
= Net income/sales X sales/assets Asset turnover => measures the relationship
between sales and assets.
how efficiently is the firm using its assets to
generate sales? Profitability: Return on equity
ROE measures the return to shareholders after
accounting for the cost of debt.
ROE = Net income / Equity Profitability: Return on equity (2)
ROE = Net income / Assets X Assets/Equity
= ROA X Capital structure leverage (LEV) In the textbook, LEV is known as Equity multiplier. Du Pont analysis
● Disaggregating ROE (Du Pont identity) ROE = Profit Margin X Assets Turnover X Leverage Application
Yahoo! ROE Profit
Turnover Leverage 2006 8.2 11.7 0.558 1.26 2007 6.9 9.5 0.570 1.28 2008 3.8 5.9 0.527 1.22 2006 18.1 29.0 0.574 1.08...
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- Spring '14