Multiple Choice
Return on Equity (ROE) relates:
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14. Financial Statement Analysis
Ratios: Return on Equity (ROE)
Multiple Choice
Which of the following ratios reports net income relative to average stockholders' equity in dollars?
A
Return on Equity (ROE)
B
Earnings Per Share (EPS)
C
Current Ratio
D
Debt-to-Equity Ratio
Verified step by step guidance1
Understand the question: The problem is asking which ratio measures net income relative to average stockholders' equity. This requires knowledge of financial ratios and their definitions.
Step 1: Recall the formula for Return on Equity (ROE). ROE is calculated as: . This ratio measures how effectively a company is using its equity to generate profit.
Step 2: Compare the other options: Earnings Per Share (EPS) is calculated as: . It measures profitability per share, not relative to equity.
Step 3: The Current Ratio is calculated as: . This measures liquidity, not profitability or equity usage.
Step 4: The Debt-to-Equity Ratio is calculated as: . This measures financial leverage, not profitability relative to equity. Therefore, the correct answer is Return on Equity (ROE).
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