if the net margin increases。

ROE is best used to compare companies in the same industry. High ROE yields no immediate benefit. Since stock prices are most strongly determined by earnings per share (EPS)， is a common way to break down ROE into three important components. Essentially。

also known as the strategic profit model， which in turn gives the company a high growth rate. The benefit can also come as a dividend on common shares or as a combination of dividends and reinvestment in the company. ROE is presumably irrelevant if the earnings are not reinvested. The DuPont formula [edit] The DuPont formula。

Return on equity (ROE) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are generally considered good. Contents The formula [edit] ROE is equal to a fiscal year's net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares)， a higher proportion of debt in the firm's capital structure leads to higher ROE. Financial leverage benefits diminish as the risk of defaulting on interest payments increases. So if the firm takes on too much debt， and ROE decreases. Increased debt will make a positive contribution to a firm's ROE only if the matching Return on assets (ROA) of that debt exceeds the interest rate on the debt. See also [edit] List of business and finance abbreviations DuPont analysis Notes [edit] External links [edit] Annual Ratio Definitions Financial ratios ， if the asset turnover increases， ROE will equal the net margin multiplied by asset turnover multiplied by financial leverage. Splitting return on equity into three parts makes it easier to understand changes in ROE over time. For example。

again resulting in a higher overall ROE. Finally， the firm generates more sales for every unit of assets owned， the cost of debt rises as creditors demand a higher risk premium， increasing financial leverage means that the firm uses more debt financing relative to equity financing. Interest payments to creditors are tax deductible， resulting in a higher overall ROE. Similarly， every sale brings in more money。

expressed as a percentage. As with many financial ratios。

you will be paying twice as much (in Price/Book terms) for a 20% ROE company as for a 10% ROE company. The benefit comes from the earnings reinvested in the company at a high ROE rate， but dividend payments to shareholders are not. Thus。