Order ID:89JHGSJE83839 | Style:APA/MLA/Harvard/Chicago | Pages:5-10 |
Instructions:
1. Using the following table, calculate the Calculate the ROE in each year using the simple formula.
2. As an analyst using just this information, what do you conclude?
Select Financial Data for ABC Corp.
2016 2017
Sales 2700 3300
Earnings After Tax 400 400
Total Assets 3500 4800
Total Equity 1600 1600
1. ROE 2016 = (Earnings After Tax) / (Total Equity) = 400/1600 = 25%
ROE 2017 = 400/1600 = 25%
2. ROE did not change year-over-year.
Can we go any deeper?
Breaking down ROE, a single ratio that measures profitability, into 3 ratios, one which measures profitability, one which measures how efficiently firms use their assets to generate sales, and one that measures the use of leverage in a firms capital structure, can help the financial manager identify what caused ROE to change, or in this case, stay the same.
DuPont ROE = EAT/Equity = (EAT / Sales) * (Sales / Assets) * (Assets / Equity)
2016: 400/2700 * 2700/3500 *3500 / 1600 = .1481 * .7714 * 2.1875 = 25%
2017: 400/3300 * 3300/4800 * 4800/1600 = .1212 * .6875 * 3.0000 = 25%
While ROE stayed the same, the net profit margin (a measure of profitability) declined and total asset turnover (a measure of how well the firm is using its assets to generate sales) declined. ROE stayed the same because the firm used more financial leverage, which could be detrimental in the future if performance in other areas continues to decline (how will the firm be able to make the interest and principal payments on its increased debt if performance continues to deteriorate?).
RUBRIC |
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40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided. |
83-76 points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration. |
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75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration. |
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DuPont Analysis of Return on Equity |
DuPont Analysis of Return on Equity