Significance of return on equity

Accounting
Tutor: None Selected Time limit: 1 Day

Explain the significance of the return on equity ratio. Who (what category or type of financial statement users) would normally be most interested in this ratio?
Nov 29th, 2014

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: return on common equity (ROCE) = net income - preferred dividends / common equity.

2. Return on equity may also be calculated by dividing net income byaverage shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two.

3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period.begin developing 



Nov 29th, 2014

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Nov 29th, 2014
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Nov 29th, 2014
Dec 5th, 2016
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