How to perform a Return On Equity calculation, and ROE analysis? This example takes you through the 2017 results of Apple Inc, and shows you both the math as well as the interpretation of the numbers. Stick around for the full discussion, as things become very interesting when you start to attach meaning to the numbers!
What is the “high level” formula for Return On Equity? Net Income divided by Equity. To find Net Income, you need to check the bottom line of the income statement. 48 billion dollar for Apple in fiscal 2017. To find the Equity number, you need to turn to the right-hand side of the balance sheet. Usually, the average of the starting and the ending Equity number of the year is used, in the case of Apple 131 billion dollar. You divide the two numbers, and there’s your ROE number of 37% for 2017. But what is driving that performance? What are its components? That’s where the DuPont formula and DuPont analysis come in!
The three step DuPont #ROE formula takes the “high level” calculation and splits it into three sections. Net Income over Sales, or Return On Sales. Sales over Assets, or Asset Turnover. Assets over Equity, or Leverage. As you see, Sales is both in the numerator as well as the denominator of the equation, so would disappear in the multiplication. The same goes for Assets, which is also in both the numerator as well as the denominator of the equation. For analytical purposes, having the three sections is very useful, as you will soon see.
Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers #financetraining in various formats: KZfaq videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!