ROE = (Profit margin)*(Asset turnover)*(Equity multiplier)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equ...
= (Net Profit/Equity)
FYI - (Assets / Equity) is also referred to as the Equity Multiplier
This portion of the equation: (Net profit/Sales)*(Sales/Assets) = ROA
So...
ROA * Equity Multiplier = ROE
11.3% * 2.46 = 27.798%
Excerpts from Dowling Company's December 31, 2013 and 2012, financial statements and key ratios are presented below (all dollar values are in millions):
2013 2012
Accounts receivable (net) $21 $17
Net sales $150 98
Cost of goods sold $99 84
Net income $21 18
Inventory turn over 6.00
Return on assets 11.3%
Equity Multiple 2.46
Dowling's return on equity for 2013 is (rounded):
