1. Introduction to Accounting Preparing for a User’s Perspective
Compute and understand the Return on Equity ratio
Debits and Credits Trainer
By Kevin C. Kimball, CPA
with support from
Free Jan. 2014
Available on the Google Play Store

2. Return on Equity (ROE) measures how efficiently:
Resources
Profits
Common Shareholders
Management

3. Return on Equity (ROE) ROE = Net Income (i.e. the “Return”)
When a company only has
Common Shareholders
Net Income (i.e. the “Return”)
ROE =
Shareholder Equity (i.e. “on Equity)

4. + Return on Equity (ROE) ROE = Net Income – Preferred Dividends
When a company has
We get our dividends first. +
Common Shareholders
Preferred Shareholders
Net Income – Preferred Dividends
ROE =
Shareholder Equity – Preferred Shareholder Equity

5. Return on Equity (ROE) as a %
X 100
= 8 %

6. Less efficient (maybe pay more dividends)
Year X1
ROE = 1%
Year X2
ROE = 2%
Year X3
ROE = 3%
Year X4
ROE = 5%
Year X5
ROE = 10%
Year X6
ROE = 15%
More efficient
Less efficient (maybe pay more dividends)
Year X1
ROE = 50%
Year X2
ROE = 40%
Year X3
ROE = 30%
Year X4
ROE = 25%
Year X5
ROE = 20%
Year X6
ROE = 15%
Interesting, but how do I use it?

7. Is 15% the best I can do with my resources? What about:
Other companies?
HLC
LLC
bonds?
Assets $100
= Assets $100
Liabilities $90 Equity $10
Liabilities $ Equity $90
Bank deposits?
Etc.?
Net Inc. $2
= Net Inc $2
ROE %
= ROE %

9. PBC started Year 2 with 10X more assets than NBC.
BUT, it generated the same $4 M in Net Income as NBC.
10%
10%
90%
90%
PBC’s management uses its common shareholder-provided resources LESS efficiently than NBC.

10. ROA: The more assets you use to generate the same amount of Net Income, the less efficient I think you are.
ROE: the equity I provide you to generate the same amount of Net Income, the less efficient I think you are

11. Introduction to Accounting Preparing for a User’s Perspective
Compute and understand the Return on Equity ratio
Debits and Credits Trainer
By Kevin C. Kimball, CPA
with support from
Free Jan. 2014
Available on the Google Play Store