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Read the three factors
NI is period net income, S is corresponding revenue, and the asset and equity bases are explicitly chosen averages.
| Factor | Question |
|---|---|
| Net margin | How much stated income belongs to each revenue unit? |
| Asset turnover | How much revenue corresponds to the selected asset base? |
| Equity multiplier | How does the asset base compare with the equity base? |
Split the margin into intermediate factors
The five-factor version replaces NI/S with NI/EBT × EBT/EBIT × EBIT/S when EBT and EBIT are nonzero. The added factors make the arithmetic chain more detailed; they do not by themselves prove the causal sources of earnings.
Use the same balances in matching factors
If turnover uses average assets, the equity multiplier must use that same asset amount for exact cancellation. Mixing average assets in one factor with ending assets in another produces a different result.
Separate a decomposition from a sustainability claim
Two companies can have similar ROE with different factors. A higher margin or turnover is not automatically permanent, and a changed equity multiplier does not prove a new borrowing transaction. Inspect the report’s movements, policies and risks before explaining the cause.
Handle zero or negative bases explicitly
The calculator uses positive revenue, average assets and average equity. It can display negative income, but it flags the five-factor chain as undefined when EBIT or EBT is zero. Other denominator conventions need their own interpretation.