Why do we use E1 instead of E0 to calculate ROE? I thought we should be using the current earnings divided by the company’s book value to get ROE. Any help would be much appreciated.
it has to be next year’s earnings divided by current Book Value.
look at it as current year’s book value (equity B0) being invested to get returns (E1) in the next year. So that is your return on equity.
Thank you. It makes sense.