Return on Equity

Entrepreneurship is the concept of developing and managing a business in order to gain profit by taking various risk factors in the corporate world. In simple words, Entrepreneurship is a willingness to start a new venture or business on your own.  This has played a vital role in global economics, and this is a particular subject in schools nowadays. To know more about Entrepreneurship, it is required to understand the business graph, profitability, and return on equity. ROE or return on equity is a subject that provides the measuring of profitability in a business in terms of equity. Shareholders equity is a calculation, and it contains a particular formula. ROE can be calculated by subtracting all the liabilities from the assets of stakeholders. 

This article is specially designed to make a clear understanding and provide clear knowledge on the concept of ROE, the return on equity formula, and more about the return on equity ratio.

Definition of return on equity

Return on equity is a measurable unit of profitability or facial calculation by dividing the net income of a business by the stakeholder’s equity. The company’s assets minus its debt are equal to the stakeholder’s equity.  ROE is also considered as a return on net assets.  It is a measuring unit that explains the profitability of a corporation and the efficiency of the company in generating profits. The good or bad of ROE depends on the normal stock peers. Sustainable growth rate and divide through the rate can also be estimated through ROE. It can assume the rough line of the ratio on an average on the peer group above it. Many companies use return on equity calculation to measure management’s performance in generating income. High ROE can be a good thing as it means best utilisation of shareholders equity and low ROE can affect the net profit of the company. Return on equity formula and calculation

ROE is a percentage and can be calculated for any company if the numbers of net income and equity are both positive. The return on equity formula is, 

“Return on equity = net income/ average shareholder’s equity”

Net income is the amount of income after taxes and net expenses that a company can generate for the period.  The average of stakeholder’s equity can be calculated by adding the equity at the beginning of the time or period. Both the time of the period, which means the beginning and the end period, should be corresponding with the time during which the net income has been earned. In the income statement, the net income of the last year or fiscal year can be found for 12 months.  From the balance sheet, stakeholders’ equity can be drawn.  The balance sheet depicts the entire history of the assets and liabilities of a company. To assess the balance sheet and income statement, it is considered to calculate return on equity on average equity regularly over a period of time. 

Analysis on Return on equity ratio or ROE ratio

Return on equity ratio can measure the efficiency of a company and how fast it can make money from the stakeholders to generate profit for the business. Unlike other investments or return ratios, the ROE ratio is a profitable ratio from the point of view of the investors, not from the company. In simpler words, the return on equity ratio indicates how much money the company made based on the investments of the investors in the organisation, not on the basis of the company’s investments in the assets of the company. 

It has been said that, if the investors are looking for a high return on their equity, then the company is actually using the investments properly in the development.  The higher ratio is always better than the lower ratio, but the ratio has to be compared with the other companies in the same industry.  Though, the return on equity should not be used very effectively compared to companies from different industries as every industry has a different level of investments and investors. 

Limitation of return on ratio concept

A higher return on equity ratio won’t be a positive thing for a company as the numbers can be manipulated. It can be indicative of numbers and raise various issues. Also, low ROE also cannot be used to calculate the company growth, nor can it be compared with other companies of positive growth as companies that are at initial stages have low Roe even though it isperforming better. 

Conclusion

Calculating ROE is simple and easy to calculate. The company’s net income should be divided by the average of the equity of all shareholders.  Shareholders’ equity is equal to the liabilities subtracted from the assets of the company.  ROE is generally a measurable unit to generate and figure out the net assets of the company. Though, the equity figure is very fluctuating and can change anyone, according to the company and shareholder’s decision. Therefore, the average equity of shareholders is generally used. 

This article has covered up all the detailed discussions on ROE or return on equity. To learn more about entrepreneurship, it is important to understand the business field and business market as well. This article will help you to understand the business process and equity holder policies to develop a better idea of entrepreneurship.