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Yahoo is not happy with its ROE number. Considering DuPont identity, what would you recommend they...

Yahoo is not happy with its ROE number. Considering DuPont identity, what would you recommend they do to improve their ROE ? The interest rates are historically at a very low level these days. Would this affect your recommendation?

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Answer #1

Ans:

As per DuPont :

ROE = (Net Income/ Sales) * (Sales/ Total Assets) * (Total Assets/ Average Sharesholder Equity)

=Profit Margin * Asset Turnover * Financial Leverage

To increase ROE number Yahoo should look all the tree component

a) Profit Margin - Profit margin is a measure of profitability, Yahoo should cut it's expenses and try to focus more on profit margin.

b) Asset Turnover - Asset turnover is a financial ratio that measures how efficiently a company uses its assets to generate sales revenue or sales income for the company, Yahoo should must increase it's asset utilization

c) Financial Leverage - Financial leverage refers to the amount of debt that a company utilizes to finance its operations, as compared with the amount of equity that the company utilizes, Yahoo have to increase financial leverage to improve ROE

Lover Interest rate will not affect my recommendation

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