CFA® Level 1: CFA® Level 1 Exam - ROE Calculation

The Return on Equity (ROE) Calculation

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Question

The ROE equals:

I. profit margin times equity turnover.

II. profit margin times asset turnover times financial leverage.

III. financial leverage times sales-to-debt ratio.

Answers

Explanations

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A. B. C. D.

Explanation

ROE = Net income/Equity -

= (Net income/sales)*(sales/equity)

= (profit margin)*(equity turnover).

You can also express this as:

ROE = Net income/Equity -

= (Net income/sales)*(sales/total assets)*(total assets/equity)

= (profit margin)*(asset turnover)*(financial leverage)

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