Respuesta :
The financial statements can be used to find the reason for the decrease in ROE because change in performance is almost always revealed in financial statement numbers.
Here are the options to this question:
- Use the statements to find trends, but keep in mind there is usually not a single reason
- Use recent financial ratios because they will usually provide the reason.
- The reason for a change in performance is almost always revealed in financial statement numbers.
- The historic performance of a company is the best place to find a reason.
Return on equity (ROE) is a financial metric that is determined by dividing net income by average total equity. It is a profitability ratio.
Return on equity = net income / average total equity
Return on equity can be decomposed using the Dupont formula:
ROE = Net profit margin x asset turnover x financial leverage
ROE = (Net income / Sales) x (Sales/Total Assets) x (total asset / common equity)
The ROE would decrease in any of these circumstances:
- Net income decreases.
- Common equity increases more than net income.
Net income and common equity can be determined by examining the financial statements.
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