Seen this Q come up again and again but don’t quite get it: The following table contans ratios for 2005/06 for benrud company: -----------------2005----2006 ebit margin – 0.15 - 0.1 asset t/o ---- 1 – 1.5 leverage ratio - 2 – 2.5 tax burden ----- 0.7 - 0.7 intersest burden - 0.95 - .95 ROE: increased, due to the increase in t/o and leverage increased because the company’s asset t/o increased You just times them all together to know that it’s increased over the year so other answers are obivously not true but from the remaining two only the first one is correct, I don’t understand why. Can someone please explain? Thanks
ROE=Net Income/Total Equity. Using the Du Pont calculation: ROE= Net profit margin x Asset Turnover x Leverage ROE= Net Income/Total sales x Total Sales/Total Assets x Total Assets/Total Equity ROE= Net Income/EBT x EBT/EBIT x EBIT/Revenues X Asset Turnover x Leverage ROE= Tax Burden x Interest Burden X EBIT Margin x Asset Turnover x Leverage ROE2006= (0.7)x(0.95)x(0.1)x(1.5)x(2.5)=0.249 ROE2005=(0.7)x(0.95)x(1.5)x(0.1)x(2)=0.214 ROE Increased due to higher asset turnover and leverage