Rate of Return on Stockholders Equity

Business profit rates are best evaluated using the accounting rate of return on stockholders' equity (ROE). ROE is net income divided by the book value of stockholders' equity, where stockholders' equity is total assets minus total liabilities. As seen in Table 10.2, ROE can also be described as the product of three common accounting ratios. ROE equals the firm's profit margin multiplied by the total asset turnover ratio, all times the firm's leverage ratio:

Net Income

Equity Net Income Sales

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