How Do They Earn Their Return On Equity?
When we discussed DuPont Analysis and corporate strategy, we noted that Return on Equity was the product of the following three financial ratios:
Net Income Margin (NI/TR) times
Asset Turnover (TR/TA) times
Leverage (TA/E)
Different companies have different financial ratios. So Return on Equity for any one company is the product of three ratios which may be quite different in value than the same three ratios for a different company. For example, here are the three ratios for five individual companies in various industries.
We recognize Dell Computer. But who are the other four companies? They are: Suntrust Banks, Albertsons (the supermarket chain), Toyota, and Florida Power and Light.
But, which is which? Not so easy to say, is it? But here are some clues:
- Banks are very highly levered, and extremely capital intensive.
- Supermarkets make very narrow profit margins, but have relatively fast asset turnover.
- Auto manufacturers are quite capital intensive, and not excessively leveraged.
- Electric utilities are very capital intensive, and have large profit margins.
Download:- FM.zip