This year Chester achieved an ROE of 5.5%. Suppose next year the profit margin (Net Income/Sales) decreases. Assuming sales, assets and financial leverage remain the same next year, what effect would you expect this action to have on Chester's ROE

Question

Gustavo Estes

Business

7 October, 15:15

This year Chester achieved an ROE of 5.5%. Suppose next year the profit margin (Net Income/Sales) decreases. Assuming sales, assets and financial leverage remain the same next year, what effect would you expect this action to have on Chester's ROE

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Answers (1)

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Talan Kim · Answer 1

If the profit margin declined next year, there will be a reduction in ROE next year

Explanation:

Profit margin is the relationship between net income and sales while return on equity (ROE) is the relationship between net income and shareholders' equity. If profit margin decreased, it implies that net income has reduced. Thus, there will a fall in ROE since ROE has a relationship with net income.