RETURN ON EQUITY RATIO
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RETURN ON EQUITY RATIO
We impart flawless services pertaining to concepts, computations, formulae involved and difficulties encountered while calculating Return on Equity Ratio. Return on equity (ROE) is the quantum of net income returned back as a percentage of shareholders equity. Return on equity is an indicator of an organization's profitability by showing the extent of profit an organization can generate with the capital that the shareholders have invested.
ROE is depicted as a percentage and computed by the following formula:
Return on Equity = Net Income/Shareholder's Equity
The ROE is effective for comparison of the profitability of an organization to that of other companies in the similar industrial sectors. There are various versions of the formulae that the investors may utilize:
- Investors desirable of viewing the return on common equity can change the formula given above by deducting the preferred dividendsfrom net income and deducting the preferred equity from shareholders' equity, resulting in the formula given below:-
Return on common equity (ROCE)= Net income - preferred dividends /common equity.
- ROE may can also computed by dividing net income bythe averageshareholders' equity. Averageshareholders' equityis computed by addition of the shareholders' equity at the start of a period to theshareholders' equityat finish of a period end and then division of the outcome by 2.
- Investors can further compute variation of ROE for a particular time span by initially utilizing the shareholders' equity figures from the start of a period as a denominator for determination of initial ROE. Further, the finish-of-period shareholders' equity can be utilized as the denominator for determination of the finishing ROE. Computing both starting and finishing ROEs permits an investor to evaluate the variation in profitability over a particular time span.
ROE is an indicator of how effectively a company utilizes capital from shareholders to produce profits and expand the company. It is different from other return on investment ratios in the sense that ROE is a profitability ratio from the investor's views point-not the organization. In other terms, ROE computes extent of capital generated on the basis of the investor's money and not the organizations investment in their assets.
Naturally, investors would prefer a high return on equity ratio since it represents the fact that the organization is utilizing its investors capital in an efficient manner. Higher ROE ratios are preferred than lesser ratios but these should be seen in comparison of other organizations in the industrial sector. As each industrial sector has different benchmarks of investors and their capital, ROE cannot be utilized for comparison of organizations out of the range of their industrial sectors.
Now an example to illustrate the concept of ROE. ABC Company sells raw material to manufacturing organizations. ABC declared net income of Rs 200,000 and dividends of Rs 20,000 during this fiscal. ABC also had 5000 Rs 10 par common shares outstanding in the fiscal. Then ROE of ABC would be computed as follows:-
ROE= Rs 200,000-Rs 20,000 =3.60
There are certain potential limitations and problems faced while computing and implementing Return on Equity. Some of these are highlighted as under:-
- A high return on equity does not necessarily imply that the organization will reap instant profits. Share processes are based on earnings per share (EPS) as contrary to return on equity. Earnings per share are the quantum of earnings per eachoutstanding shareof an organization's stock. EPS equals to profit divided by theweighted averageof common shares.
- ROEis majorly utilized as the financial indicator to gauge the performance of an entity which can be further utilized to gauge financial viability. By focusing on ROE, the management may tend to ignore the cash flow which is the most important factor. ROE uses net income only which cannot be collected from the investors.
- As we are aware, ROE is computed by utilizing the entire financial information which can be easily manipulated compared to the non-financial figures. There two types of fraudulent practices, one is by pilfering organization assets and other is by manipulating financial books. To achieve a higher ROE, the organization's management tries to manipulate financial information which is a serious limitation faced while calculating ROE.
We provide superior quality services and have seasoned accounts experts on board who guide our readers and investors for completion of their assignments and homework related to implementation of Return of Equity Ratio. Capital Employed. Some of the services being provided by us are mentioned as below:-
- High quality technical expertise and familiarization to the methods of techniques of accounting which effectively guide our investors to utilize the concept of ROE and its impact
- Clear and concise comprehension of the concepts involved for effective implementation of ROE.
- We have also given detailed descriptions related to ROE, ROCE and EPS and elaborated the related concepts of these parameters.
- We have provided examples of ROE which serve as guidelines for its effective implementation. Examples along with formulae and methods of computation of ROE have been explained to our readers for better understanding.
- We have described the limitations and problems encountered while applying ROE and have given appropriate solutions.
- We have seasoned faculty on board providing knowledge and technical skills for an effective implementation of ROE
- We make our readers aware regarding the various factors related to ROE making it easy to comprehend and implement
- We have made a clear distinction between ROE and ROCE explaining the impact of higher or lower ROE on an organization's performance
- We provide effective online tutoring on various aspects of ROE through latest technological means viz. WebEx, video conferencing etc. which helps in a fruitful long distance interaction with our readers making them comfortable in understanding the various concepts of ROE.
- We have a seamless software and hardware interface facilitating flawless online tutoring related to ROE. The tireless efforts put in by our instructors ensure effective implementation of ROE.
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