Question

This year Andrews achieved an ROE of 8.9%. Suppose next year the profit margin (Net Income/Sales) increases. Assuming sales, assets and financial leverage remain the same next year, what effect would you expect this action to have on Andrews's ROE?

Answer 1

ROE ratio is expected to increase

Explanation:

ROE (“Return on Equity”) = Net Income / Shareholders Equity

Is a metric for evaluating returns and finance management from equity to grow business.

In this case, if the profit margin increases with the same financial leverage (means there are no more financial costs) the return on the shareholder's equity will be increased.