Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Return on Equity (ROE)

Financial Accounting

14. Financial Statement Analysis

Ratios: Return on Equity (ROE)

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Multiple Choice

What does a return on equity (ROE) of 15\% represent?

The company's assets increased by 15\% over the year.

The company generated a net income equal to 15\% of its average shareholders' equity during the period.

The company paid 15\% of its net income as dividends to shareholders.

The company earned a 15\% return on its total assets.

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Verified step by step guidance

Understand the concept of Return on Equity (ROE): ROE measures a company's profitability by showing how much net income is generated as a percentage of shareholders' equity. It is calculated using the formula:

ROE = \frac{Net Income}{Average}

Analyze the given ROE value: A ROE of 15% means that the company generated net income equal to 15% of its average shareholders' equity during the period. This indicates how effectively the company is using its equity to generate profits.

Clarify the incorrect options: The statement 'The company's assets increased by 15% over the year' is unrelated to ROE, as ROE focuses on net income and equity, not asset growth. Similarly, 'The company paid 15% of its net income as dividends to shareholders' pertains to dividend payout ratio, not ROE. Lastly, 'The company earned a 15% return on its total assets' refers to Return on Assets (ROA), not ROE.

Relate ROE to financial performance: A higher ROE generally indicates better financial performance, as it shows the company is efficiently generating profits relative to shareholders' equity. However, it is important to compare ROE across similar companies or industries for meaningful insights.

Summarize the correct interpretation: The correct answer is that the company generated a net income equal to 15% of its average shareholders' equity during the period. This reflects the company's ability to create value for its shareholders.