Question

You are looking at the Return on Equity of a business your company is considering buying. The business's ROE is 17 percent. Barring any one-time accounting adjustments, what does this ROE tell you?

Answer 1

ROE signifies the proficiency with which a company generates profits relative to shareholder equity, and a 17 percent ROE suggests the effective use of equity to produce profits. It informs investment decisions but must be assessed about industry standards.

Step-by-step explanation:

The Return on Equity (ROE) of 17 percent tells us how effectively the company is generating profits from its equity. In other words, for every dollar of equity, the business is generating 17 cents in profit. This measure is significant as it helps investors gauge the efficiency with which a company's management is using shareholders' equity to create profits, and it can be a determinant in the decision-making process regarding the purchase of the business. It's important to note that ROE does not factor in the duration of the investment, unlike Energy Returned on Energy Invested (EROEI), which considers the ratio of output over the investment's lifetime. While EROEI is more relevant to evaluating energy sources, ROE is crucial for assessing corporate financial performance. When considering the purchase of a business, a high ROE could be seen as favorable. However, it should be compared to the industry average and the returns of peers to gauge relative performance.