ITPEC IP April 2024 Question 69

Equity — ROE is return on equity: net income divided by shareholders' equity.

ROE shows how efficiently a company turns the capital its shareholders have invested into profit: ROE (%) = net income ÷ shareholders' equity × 100. A company with net income of 10 million dollars and equity of 100 million dollars has an ROE of 10%. The related ROA (return on assets) divides the same profit by total assets instead.

Answer (d)

Why not others:

• •(a) Earnings — earnings (profit) are the return, the numerator of the ratio; the E is its denominator
• •(b) Employee — profit per employee is a productivity measure, not ROE
• •(c) Enterprise — not part of this ratio; enterprise value belongs to valuation measures such as EV/EBITDA

Key rule: ROE = profit ÷ shareholders' equity measures the return to the owners; ROA = profit ÷ total assets measures the return on everything the company uses, including borrowed money.

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