Finance Ratios- Need help understanding this ROE assignment.

For this assignment we are going to focus on one ratio which can actually be calculated using three other ratios. That ratio is the Return on Equity.

Profit Margin (bottom line) Turnover (asset utilization) Equity ratio (financial cushion)

A note on equity ratio: (equity/assets)

Say a firm had $100 in assets and $37 dollars in equity The equity ratio would be 37/100 or 0.37

What does that mean?

How can a firm be financed?

How much came from equity (owners)? How much from creditors?

In this case for every dollar of assets, owner have funded 0.37 cents and creditors 0.63 cents.

The second set of ratios you will need to consider are market value ratios. How does the firm you selected compare to industry averages, main competitor(s) etc.

I will select an industry using the referenced database and download the data. The two firms one with a relatively high ROE and one with a relatively low ROE in the industry. Need to help understanding how to analyze each of the firms taking into consideration the components of ROE as identified above. This may require ROE analysis that isn't in the school text which is primarily why I'm asking for assistance.

Hints: You may want to look at each of the components of ROE and compare those. You may want to look up (another book, online, etc) DuPont Identity or DuPont Analysis. Realize the components you need to analyze may or may not be in the spreadsheet you download from the referenced database. If not find what you need but make sure you document where you find any data used. (Yahoo finance is a good site and there are others.)

The final work that I must devise based on your Tudor session:

Include the downloaded industry spreadsheet for the industry you selected.

Identifying the firms you selected within the spreadsheet by changing the color of the font for that firm on each tab to red.

A table that calculates the ROE for each firm using the three components. Make sure each column is labeled. (You should have columns that are labeled ROE, Net Profit Margin, Asset Turnover, Equity Ratio) A similar table for the market value measures.

Draft abrief paper; about two pages maximum (2 plus/minus a half page). My paper needs to address the reasons why one firm has a high ROE, why one firm has a low ROE and what could be done to improve the lower performing firm based on ROE (if it is really performing at a lower level). Perform similar contrast and comparisons for the market value ratios.

Be sure to address issues such as marketing, asset utilization, financing and if your chosen firm appears to be under or overvalued.