Question

Needham Pharmaceuticals has a profit margin of 3.5% and an equity multiplier of 1.7. Its sales are $90 million and it has total assets of $44 million. What is its Return on Equity (ROE)? Round your answer to two decimal places.

Answer 1

Solution:

As per the Du pont Equation

Return on equity = Equity multiplier * Total asset turnover * Profit margin

As per the information given in the question we have

Equity multiplier = 1.7

Profit margin = 3.5 % = 0.035

Sales = $ 90 Million   ; Total Assets = $ 44 Million

We know that the Total assets Turnover ratio = Sales / Total assets

Thus applying the available information the formula

We have Total assets Turnover ratio = 90 / 44 = 2.0455

Thus applying the above values in the Du Pont equation we have

ROE = 1.7 * 2.0455 * 0.035

= 0.1217

= 12.17 %

Thus the Return on Equity ( ROE ) = 12.17 %