Amazon vs Ebay

Return on Equity (ROE) = Net Income / Owner’s Equity

The above ROE calculation above can be broken down into component parts through the widely used DuPont Method of calculating ROE. The DuPont method start this process by calculating the profitability of the company by looking at the profit (net income) margin which is simply the dollar amount of net income generated per dollar of sales revenue.

The formula for calculating the profit margin is:

Profit margin = Net income / Sales Revenue

If the Net Income Margin increases it indicates that more profit per dollar of sales is obtained which would be the result of operating efficiency, reduced expenses or changes in accounting policy. As noted, there are numerous factors that comprise this number. If the net income margin changes, it is prudent to drill down and identify which accounts are responsible for the change. If margins are expanding due to strong demand for products/services or reduced expenses due to improved operations, it can be viewed as a positive. However, if it is result in a change in accounting policy or assumption made my corporate managers on the way in which the financial statements are assembled, the investor should be aware of what has happened, and why the changes were made. Business are in the business of generating revenue which is increasing the denominator (Sales Revenues). This fundamental concept should never be lost on the equity investors and an eye on revenues should be kept at all times.

Then we examine the company’s asset turnover ratio which indicates the amount of sales revenue the company is able to generate based on the tangible and intangible assets (economic resources) the company has on its books.

The formula for calculating asset turnover ratio is:

Asset Turnover Ratio = Sales Revenue / Assets

It should be noted here that this ratio must be taken into the context of the input data from the financial statements. The denominator of this ratio is the book value of the...