Explore BrainMass

Explore BrainMass

    3 ratio components of Return on Equity (ROE) are described and illustrated.

    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 February 24, 2021, 2:23 pm ad1c9bdddf
    https://brainmass.com/business/return-on-equity/3-ratio-components-of-return-on-equity-roe-are-described-and-illustrated-17696

    Solution Preview

    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 $ ...

    $2.19

    ADVERTISEMENT