Question

Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 2.0. Its sales are $110 million and it has total assets of $42 million. What is its Return on Equity (ROE)? Round your answer to two decimal places.

Answer 1

Answer:

ROE is 0.1571 or 15.71%

Explanation:

The ROE or return on equity is a measure of a business's profitability in relation to its equity. The Dupont equation breaks down the ROE into three components which are used to calculate the ROE. The formula fro ROE under dupont equation analysis is,

ROE = Net Profit/Sales  *  Sales/Total Assets  *  Total Assets/Total Equity

• The part of Net Profit/Sales is also known as profit margin.

• The part of Sales/Total Assets  is also known as Assets Turnover
• The part of Total Assets/Total equity is also known as equity multiplier

ROE = 0.03  *  110/42  *  2

ROE = 0.1571428571 rounded off to 0.1571