Ratios: DuPont Model for Return on Equity (ROE) definitions Flashcards
Ratios: DuPont Model for Return on Equity (ROE) definitions
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Return on Equity Measures profitability by comparing net income to average common equity, indicating how effectively shareholder funds generate earnings. DuPont Model Analytical framework that breaks down return on equity into three components to reveal underlying drivers of profitability. Profit Margin Shows net income earned per dollar of sales, highlighting how much profit remains after all expenses are deducted from revenue. Total Asset Turnover Indicates efficiency by showing how many dollars of sales are generated for each dollar invested in assets. Equity Multiplier Reflects financial leverage by comparing average total assets to average common equity, revealing reliance on debt. Leverage Ratio Alternative name for equity multiplier, emphasizing the extent to which a company uses debt to finance assets. Net Income Represents the residual earnings after all expenses, taxes, and costs are subtracted from total revenue. Average Common Equity Represents the mean value of common shareholders' equity over a period, used as a base for profitability ratios. Net Sales Total revenue from goods or services sold, minus returns, allowances, and discounts. Return on Assets Shows how efficiently a company uses its assets to generate net income, calculated as net income over average total assets. Liabilities Obligations or debts a company must repay, which, along with equity, finance the company's assets. Common Shareholders Owners of a company's common stock, whose equity is the focus in return on equity calculations. Net Loss Occurs when total expenses exceed total revenue, resulting in negative net income and potentially negative return on equity.
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