ROE = (net profit margin)(total asset turnover)(equity multiplier). What is the advantage of using this expanded version of the ROE formula versus using the simplified version which is net income divided by total equity?
What will be an ideal response?
Answer: The expanded version provides more insight into a firm's operations. The net profit margin reflects the efficiency of operations. The total asset turnover measures the ability of assets to generate sales. The equity multiplier reflects the use of leverage.
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Fill in the blank with correct word.