Hey I know this might sound like a simple question but I was doing a few problems in the book and When they calculate ROE, they do not take the average of the equity instead they just use the most recent equity value to calculate ROE. Any ideas on why they did it like this? Is there a different time when you would use the average of the equity vs the most recent equity amounts? Thanks!
People are all over the map on that using average, beginning, ending equity. There might be reasons to use any of the above in a particular situation but the problem will have to make it clear on the exam.
Thanks a lot Joey! I appreciate your insight!
I have another question abour the Roe calculation. Do you add the profit of the year into the equity value? I guess so, but i was wondering if we can avoid doin it. I would even make sense, since this is a return ratio and will be likely express the percentage return of an investment in the company. The profit generated at year end, was not part of the capital invested in at the beginning ofa year, then we should not take it into account thanks to all
No, you don’t add it in. If you think about what ROE is trying to measure, it is the return generated by the equity “used”. As you say, the equity created by retained earnings is not used during the period, so is excluded. It would be a bit of a pointless ratio if it was distorted by dividend payment!
thanks i needed a confirmation