I have a question concerning ROE evolution I saw in some explanation that an increase in Expenses (for exemple due to à Lease) will reduce ROE, because Net Income will decrease and Equity will remain stable My question is: if Net Income decreases, then Retained Earning decreases then Equity decrease. So Equity is not the same Where is my mistake ? thks
when you increase expenses - Net Income reduces. but on the other side - you have an asset created on the balance sheet. A Increases, L remains same - so E increases by the same amount. the net income reduction + E Increase offset each other - to leave Equity the same.
bben Wrote: ------------------------------------------------------- > I have a question concerning ROE evolution > > I saw in some explanation that an increase in > Expenses (for exemple due to à Lease) will reduce > ROE, because Net Income will decrease and Equity > will remain stable > > My question is: if Net Income decreases, then > Retained Earning decreases then Equity decrease. > So Equity is not the same > > Where is my mistake ? > thks Typically Net Income will be less than 10% of Equity. Suppose it is 10%. So if Net Income falls by say, 1%, then the difference it will make to Equity will only be 0.1%, which would be a much smaller impact on the ROE calculation.