Pacific Capital Bank is looking at using the return on equity model and the DuPont formula to measure the performance of certain capital investments.
- The Return on Equity looks at net income after tax in relationship to shareholder equity.
- The DuPont formula looks at net profit margin in relationship to total asset turnover to determine return on assets.
Use the library, Internet, and course materials to research both of these methods, and write a 750-word document that covers the following:
- Explain how the Return on Equity formula can be used as a measurement tool for general performance in a commercial bank.
- Explain how the DuPont formula is used as a measurement of asset performance in banks.
Then answer the following questions:
- Do the Return on Equity model and the DuPont formula provide a good measurement asset performance?
- Why or why not?
Please find guidelines and ideas for Measurement of Asset Performance, ROE and DuPont Measure Assets Performance in the attached file.
Use of Return on Equity
In banks and other commercial institutions, return on equity (ROE) method is used to measures profitability and performance of the organization. ROE is calculated through income/shareholders' equity. It is an assets measurement technique because it expresses the relationship between income and owners funds. It measures the Pacific Capital Bank profit earning capacity. ROE measures the return produced for the owners and return on assets (Morin & Jarrell, 2001). Bank regulators and analysts could use return on assets and return on equity to assess performance of bank and forecast the trends in market. This model is helpful to predict the success and failure of Pacific Capital Bank as it will measure its significance to measure the efficiency to utilize the assets in an optimum manner to generate more revenue.
ROE measure the level of profitability and limited equity capital ratio of Pacific Capital Bank. ROE shows how well the Pacific Capital Bank is using the resources of owners and how effectively they are earning relative to the value of owners' equity. It measures Pacific Capital Bank's returns and their ability to satisfy to equity shareholders (Kosmidou & Zopounidis, 2008). It is also significant for banks as they could compare their performance with competitors or with the overall industry averages. So, it analyzes the company's financial position in the market and their ability to survive in the market. It also analyzes the situation of market or industry and position in the market so it is significant for commercial banks to measure their asset performance.
ROE is also effective to evaluate bank's operational performance, risk profile and leverage. It explains bank's ability to face the risks and potential trade-off between risks and returns (Shil, 2009). Pacific Capital Bank maintains operations through effective use of funds or equity and analyzes the uncertainty of market by ...
This solution provides a detailed discussion of the given accounting questions.