The return on assets (ROA) and return on shareholders' equity (ROE) are two important ratios used to assess company performance. ROA indicates a company's overall profitability by expressing net income as a percentage of average total assets. ROE measures the return to suppliers of equity capital by dividing net income by average shareholders' equity. When ROE is greater than ROA, management is employing financial leverage - using assets funded by debt.
Analysis:
1. An article located here discusses the factors that drive ROE. Access the article and explain Du Pont's formula for analyzing ROE.
2. Dell Computer Corporation and Hewlett-Packard are two companies in similar industries. Using EDGAR (or the individual company websites), locate HP's financial statements for the year ended October 31, 2004 and Dell's financial statements for the year ended January 28, 2005 and compare their ROE using the Du Pont formula. Here are direct links to Dell's and HP's investor relations websites that contain links to company annual reports.
Here is the solution to this case.