Calculate Return on Equity (ROE) For Phone Inc.
What is the company's ROE?
Phone Inc., has an equity multiplier of 1.36, total asset turnover of 1.62, and a profit margin of 8 percent. Calculate the company's Return on Equity (ROE) based on the given data.
Calculation of ROE:
Using the DuPont formula, we can calculate the Return on Equity (ROE) for Phone Inc. with the given data:
ROE = Equity Multiplier × Total Asset Turnover × Profit Margin
Equity Multiplier = 1.36, Total Asset Turnover = 1.62, Profit Margin = 8%
Plugging in the values:
ROE = 1.36 × 1.62 × 0.08 = 0.177696
To express this as a percentage, we multiply by 100:
ROE = 17.7696%
Rounding to two decimal places:
ROE ≈ 17.77%
Therefore, the company's Return on Equity (ROE) is approximately 17.77%, indicating its ability to generate profit.
Understanding Return on Equity (ROE)
Return on Equity (ROE) is a financial metric that measures a company's profitability and efficiency in utilizing shareholder equity. It shows how much profit a company generates with each dollar of shareholder equity.
In the case of Phone Inc., an ROE of 17.77% means that for every dollar invested by shareholders, the company earns around 17.77 cents in profit. This reflects positively on the company's performance and indicates it is effectively utilizing equity to generate returns.
ROE is a key indicator for investors to assess the company's financial health and performance. A higher ROE typically signifies a more efficient and profitable company, attracting potential investors and reflecting positively on shareholder value.
By calculating and analyzing the ROE, investors and stakeholders can gain insights into the company's profitability, operational efficiency, and overall financial strength.