3 ratio components of Return on Equity (ROE) are described and illustrated.
Not what you're looking for? Search our solutions OR ask your own Custom question.
This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!
Components of Return on Equity© BrainMass Inc. brainmass.com May 24, 2023, 1:20 pm ad1c9bdddf
Return on Equity has three ratio components. The three ratios that make up Return on Equity are:
1. Profit Margin = Net Income / Sales
2. Asset Turnover = Sales / Assets
3. Financial Leverage = Assets / Equity
Profit Margin measures the percent of profits you generate for each dollar of sales. Profit Margin reflects your ability to control costs and make a return on your sales. Profit Margin is calculated by dividing Net Income by Sales. Management is interested in having high profit margins.
EXAMPLE — Net Income for the year was $ 60,000 and Sales were $ 480,000. Profit Margin is $ ...