Is the Firm Providing a Reasonable Return

on the Owner s Investment? (1 of 2)

Return on Equity (ROE) ratio measures the
accounting return on the common stockholders’
investment.

Return on Net Income

=
Equity Common Equity
Is the Firm Providing a Reasonable Return
on the Owner s Investment? (2 of 2)
What is the ROE ratio for H. J. Boswell, Inc.?
• ROE = $204.75 million ÷ $911.25 million = 22.5%
Thus the shareholders earned 22.5% on their
investments. This is higher than peer average of 18%
Using the DuPont Method for
Decomposing the ROE ratio (1 of 4)
• DuPont method analyzes the firm s ROE by
decomposing it into three parts.
ROE = Profitability × Efficiency × Equity Multiplier
• Equity multiplier captures the effect of the firm s
use of debt financing on its return on equity. The
equity multiplier increases in value as the firm
uses more debt.