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Start with a matched identity
Net income 100, revenue 1,000, average assets 800 and average equity 400 give 10%×1.25×2 = 25%, matching 100/400.
Change only one factor’s base
If the equity multiplier instead uses ending assets 1,000 over the same average equity 400, the product becomes 10%×1.25×2.5 = 31.25%. The asset quantity no longer cancels.
| Chain | Product |
|---|---|
| Average assets in both matching factors | 25% |
| Average assets for turnover; ending assets for multiplier | 31.25% |
Identify the definition before diagnosing an economic change
The altered result can be a measurement-convention mismatch rather than a change in underlying profitability. Keep balance bases and periods beside each factor.
Choose a representative stated average
A simple beginning/ending average is one convention. More detailed averages can be useful for seasonal or transaction-heavy periods. Exact cancellation requires consistent amounts whichever convention is selected.