Team Member Guide

  Financial Structure Return On Equity

Looking For Wealth

INCOME STATEMENT
Sales $160,000 100.0%
Variable Costs $90,000 56.3%
Period Costs $40,000 25.0%
EBIT $30,000 18.8%
Interest $4,000 2.5%
Tax $9,100 5.7%
Profit $16,900 10.6%
LIABILITIES & OWNER'S EQUITY
Accounts Payable $9,380 7.0%
Current Debt $12,060 9.0%
Long Term Debt $58,960 44.0%
Total Liabilities $80,400 60.0%
Common Stock $21,038 15.7%
Retained Earnings $32,562 24.3%
Total Equity $53,600 40.0%
Total Liab. & O. E. $134,000 100.0%
RATIOS
ROS 10.6%
Asset Turnover 119.4%
Leverage
Assets/Equity 2.5
(OR Assets/Debt 1.7
times Debt/Equity) 1.5
ROE 31.5%

Traditionally, wealth is found at the EBIT line on the income statement. Looking at the income statement we can see that the wealth is split between lenders (interest) , government (taxes) , and owners (profits).

However, managers capture wealth before the EBIT line in form or salaries, buried in period costs. In recent times this has become a major issue in strategy, expressed in two parts, executive compensation and management turnover. Although that discussion is far broader than we can discuss here, we can note that if the company is publicly held, management will seek moderate levels of leverage, neither too low (risk of take-over) nor too high (risk of bankruptcy) . In privately held companies, management will prefer ROA to ROE and reduce leverage to more modest levels.