According to the basic DuPont equation, a firm's roe is the product of profit margin multiplied by asset turnover multiplied by financial leverage.
The ratio of total sales or revenue to average assets is known as asset turnover. Investors can use this measure to gauge how well a company is utilizing its resources to drive sales. Investors analyze similar businesses in the same industry or group using the asset turnover ratio.
Leverage in finance refers to borrowing money to acquire more assets. To raise the return on equity, leverage is used. However, using too much financial leverage makes it harder to pay off debt, which raises the chance of failing.
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