- CFA Exams
- 2021 CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 24. Financial Analysis Techniques
- Subject 3. The DuPont System

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**CFA Practice Question**

Which of the following formulas is the formula for computing return on equity (ROE)?

B. Net income divided by equity

C. Sales divided by assets

A. Net income divided by assets

B. Net income divided by equity

C. Sales divided by assets

Correct Answer: B

The formula for computing return on equity is net income divided by equity. Return on equity will be greater than return on investment when a company has financial leverage greater than one.

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**User Contributed Comments**
7

User |
Comment |
---|---|

Gina |
NI/A=ROI NI/E=ROE A/E=Fin.Leverage S/A=A Turnover |

julescruis |
thanks gina |

godz |
if you got this wrong dont show up at the exam center |

Drzewes |
GIna: NI/A is ROA ROI = NI/ Equity + total debt I am almost :) sure. |

endlessfin1te |
isn't Asset = Equity + Debt anyway? |

johntan1979 |
Look at the explanation given in the answer... the only way ROE > ROI is when the equity multiplier or leverage is > 1. In other words, ROI = NI/A = ROA |

ldfrench |
@godz, el oh el plz don't be mean (i mean it plz) |