Question

This year Andrews achieved an ROE of 10.7%. Suppose management takes measures that decrease Asset turnover (Sales/Total Assets) next year. Assuming Sales, Profits, and financial leverage remain the same, what effect would you expect this action to have on Andrews's ROE

Answer 1

Andrews's ROE would decrease

Step-by-step explanation:

Return on equity is an example of a profitability ratio.

Profitability ratios measure the ability of a firm to generate profits from its asset

Return on equity = net income / average total equity

Using the Dupont formula, ROE can be determined using:

ROE = Net profit margin x asset turnover x financial leverage

ROE = (Net income / Sales) x (Sales/Total Assets) x (total asset / common equity)

If asset turnover decreases and other ratios remain constant, ROE declines