His final project will include applying the concepts learned during class

Calculated using the DuPont model, Return on equity (ROE), is a measurement of how well a company’s equity is being used to generate profits. It takes into consideration three major components: net profit margin (or asset turnover ratio), financial leverage ratio and financial loss ratio.

This formula calculates ROE.

ROE = (Net Profit Margin x Asset Turnover Ratio x Financial Leverage Ratio) / Average Shareholders’ Equity

The net profit margin is the ratio of total sales divided by net income. Asset turnover ratio measures profitability relative to assets that are used for operations. Both ratios can be expressed in percentages. Lastly, financial leverage ratio looks at the amount of debt used to finance the company’s operations relative to shareholder equity.

All these aspects are important to get a clear picture about how well a company is using its resources, and how efficient its capital structure is in creating value for its shareholders.