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

The ratio of net profit to total owners' equity is called return on:

Assets

Equity

Investment

Sales

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Verified step by step guidance

Understand the concept: The ratio of net profit to total owners' equity is a financial metric used to measure the profitability of a company relative to the equity invested by its owners. This ratio is commonly referred to as 'Return on Equity (ROE)'.

Identify the formula for Return on Equity (ROE): ROE is calculated using the formula:

\frac{Net Profit}{Total Owners' Equity}

. This formula expresses the percentage of profit generated for each dollar of equity invested.

Clarify the components: Net profit refers to the earnings remaining after all expenses, taxes, and costs have been deducted from total revenue. Total owners' equity represents the total investment made by the owners, including retained earnings and contributed capital.

Relate the formula to the options provided: The term 'Return on Equity' directly corresponds to the ratio of net profit to total owners' equity. This distinguishes it from other financial metrics such as Return on Assets, Return on Investment, or Return on Sales.

Conclude the explanation: Based on the formula and the definition, the correct answer is 'Equity', as the ratio specifically measures the return generated on the owners' equity invested in the business.