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

Return on Equity (ROE) relates:

Net sales to total assets

Gross profit to net sales

Net income to shareholders' equity

Total assets to total liabilities

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Verified step by step guidance

Understand the concept of Return on Equity (ROE): ROE measures the profitability of a company in relation to the equity provided by shareholders. It is a key financial ratio used to assess how effectively a company is using shareholders' equity to generate net income.

Identify the formula for ROE: ROE is calculated using the formula:

\frac{Net Income}{Shareholders' Equity}

. This formula highlights the relationship between net income and shareholders' equity.

Clarify the components: Net income is the profit a company earns after deducting all expenses, taxes, and costs. Shareholders' equity represents the residual interest in the assets of the company after deducting liabilities, which includes common stock, retained earnings, and other equity components.

Compare ROE to other financial ratios: ROE specifically relates net income to shareholders' equity, unlike other ratios such as Return on Assets (ROA), which relates net income to total assets, or Gross Profit Margin, which relates gross profit to net sales.

Apply the formula in practice: To calculate ROE, divide the net income by the shareholders' equity for a given period. This will provide insight into how efficiently the company is generating profits from the equity invested by shareholders.