From the course: Finance and Accounting Tips

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The DuPont framework and return on equity

The DuPont framework and return on equity

From the course: Finance and Accounting Tips

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The DuPont framework and return on equity

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- In 2015, Harley-Davidson, the motorcycle maker, reported declining sales and declining profits, yet their return on equity, a common measure used by investors to determine how their investment is performing, increased by a remarkable 12%, unbelievable. Return on equity, computed by dividing net income by total stockholders' equity, is the single measure that summarizes the financial health of a company. Return on equity, ROE, can be interpreted as the number of cents of net income an investor earns in one year buy investing $1 in the company. As a very rough rule of thumb, ROE consistently above 15% is a sign of a company in good health. ROE consistently below 15% is a sign of a trouble. Harley's return on equity increased from 29%, very good, to 41%, unbelievable. And the obvious question is, how did that happen? To answer that question, let's think for a moment about what a business does. A business obtains money to purchase assets. With those assets, the business intends to…

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