Learn about the DuPont framework, a systematic approach to identifying general factors causing return on equity (ROE) to deviate from normal. This approach uses ratios to breakdown ROE into three components: profitability, efficiency, and leverage.
- 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 generate sales.…And with those sales the intent is to generate income.…
Skill Level Beginner
Q: Why can't I earn a Certificate of Completion for this course?
A: We publish a new tutorial or tutorials for this course on a regular basis. We are unable to offer a Certificate of Completion because it is an ever-evolving course that is not designed to be completed. Check back often for new movies.