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Return on equity, or ROE, is the most common measure of a company's profitability. But ROE is itself the product of three ratios, or levers: net margin (earnings/revenues, expressed as a percentage), asset turnover (revenues/assets), and financial leverage (assets/equity). Multiplying the three levers together gives us ROE, and raising any one of the three levers will increase ROE. (Note that revenues and assets cancel out, leaving us with the more familiar formula for ROE, earnings/equity.)
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Net Margin and Asset Turnover >>
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