From the course: Finance and Accounting Tips in Five Minutes or Less
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The DuPont framework and return on equity
From the course: Finance and Accounting Tips in Five Minutes or Less
The DuPont framework and return on equity
- In 2023, Tesla reported record sales and record profits, yet their return on equity, a common measure used by investors to determine how their investment is performing, decreased from 28% to 24%. So how does that happen? Return on equity, computed by dividing net income by total stockholders' equity, is the single measure that summarizes the financial health of a company. Return on equity, abbreviated as ROE, can be interpreted as the number of cents of net income an investor earns in one year by investing $1 in the company. As a very rough rule of thumb, ROE consistently above 15% is a sign of a company in good health. ROE consistently below 15% is a sign of trouble. Tesla's a return on equity decreased from 28%, which is very good, to 24%, which is not as good. And the obvious question is, how did that happen? To answer that question, let's think for a moment about what a business does. A business obtains money to purchase assets. With those assets, the business intends to…
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