Decomposition of ROE to Selected Financial Analysis Indicators
Decomposition of ROE to Selected Financial Analysis Indicators

Author(s): Denisa Oriskóová, Renáta Pakšiová
Subject(s): Business Economy / Management, Accounting - Business Administration
Published by: Masarykova univerzita nakladatelství
Keywords: return on equity; corporate finance; impact of financial indicators;
Summary/Abstract: The existence of company in a rapidly varying environment is conditioned by the ability to respond properly to challenges arising from changing business environment and customer requirements. Decisions on the future direction of a company eventually are translated into financial form and affect the financial health of company. Assessment and prediction of financial health is key to the company's management. Data sources for assessment of financial situation for internal users are not only financial statements but also various internal reports. However, to external users are available only published financial statements and annual reports, which are the resources of information for financial situation assessment as basis for decision making. The picture of the company's financial performance is supplemented by financial analysis indicators, which should be evaluated in their mutual contexts. Evaluation based on one indicator can lead to incorrect conclusions, so for this reason in this paper is investigated decomposition of the return on equity (ROE) to selected indicators. The aim of the paper is to quantify the impact of indicators, such as tax burden ratio, interest burden ratio, earnings before interest and tax (EBIT) margin, asset turnover and financial leverage, on ROE development. In the paper are used statistical methods, specifically regression and correlation analysis, which were applied on the sample of the Slovak Republic engineering industry company's. By linear regression model were found out that to the development of ROE the most significant impact has tax burden indicator and asset turnover, while the equity multiplier has the least significant impact.

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