Profitability Return on EquityExample 1CompanyROA*Equity Multiplier=ROE

A10%1.515%

B10%2.020%

The equity multiplier shows the impact of debt on the ROE. It levers the ROE. Company B carries more debts, its ROE is higher than company A. Leverage magnify the changes in its return.

Example 2CompanyProfit marginxAssets TurnoverxEquity Multiplier= ROE

C7.5%1.251.514%

D1.5%62.018%

E3.5%2.24.030.8%

F5.5%32.033%

Industry average5.0%2.52.025%

C: keeps 7.5 cents for each $ of sales, asset turnover ratio is way below average, very low equity multiplier. (examine whether the company has extra assets? If yes, sell unused assets, If not, focus on improving sales, how? Since the company uses debt lower than industry average, the company may increase its debt usage)D: low PM, asset turnover is high, generate a lot of sales, but did not keeps its cost under control, spending too much to maintain its sales volume. PM measure the ability to control cost. Cut costs or raise prices.E: below Ind. Average PM and asset turnover, however has a large ROE, why? Heavy use of debt has levered its ROE above average. Poor cost control and ability to generate sales, large equity multiplier implies this company is very risky.F: example of a well-run company.