From the course: Finance for Non-Financial Managers (2015)
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Calculating return on equity
From the course: Finance for Non-Financial Managers (2015)
Calculating return on equity
- Return on equity is a general overall measure of how well a firm is doing. The DuPont framework breaks return on equity down into three parts, profitability, efficiency, and leverage. Let's use an example to illustrate. You can see here we have Uncertain's balance sheet and their income statement. What can we conclude by looking at this? For starters, we can see that they had total assets of $14,500, sales of $20,000, and income of $700. Is that good? Is that bad? It's hard to tell, so let's compare them with Benchmark company. What can we conclude by looking at Benchmark and Uncertain side by side? Well, the first thing we notice is Benchmark is bigger and if we do a little mental math, we can conclude, well, it looks like their net income's higher relative to their sales. But just a raw comparison of Benchmark's financial statements with Uncertain's financial statements, that's tough to do. There has got to be a…
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