True or False: Return on equity is calculated by dividing net income by total assets.

True or False: Return on equity is calculated by dividing net income by total assets.

• A. True
• B. False
• C. Only for publicly traded companies
• D. Depends on the financial analysis method

Answer: (B)

Return on equity (ROE) is a key financial metric that measures a company's profitability relative to the equity held by shareholders. It is calculated specifically by dividing net income by shareholder's equity, not total assets. The formula for ROE is: \[ ROE = \frac{\text{Net Income}}{\text{Shareholder's Equity}} \] Net income reflects the profits of the company after all expenses have been deducted, while shareholder's equity represents the net assets owned by shareholders. This metric is vital for understanding how effectively a company is using the equity invested by its shareholders to generate profits. The statement in question misidentifies the denominator by implying that total assets, which include both equity and liabilities, are used in this calculation. This confusion leads to the assertion being false. Focusing on other available options: the assertion that ROE is only applicable to publicly traded companies does not capture the broader applicability of this measure, as private companies can also calculate ROE for internal analysis or reporting. The claim that it depends on the financial analysis method is not accurate either; the calculation remains consistent regardless of the method, as long as it follows the standard financial metrics.

Return on equity (ROE) is a key financial metric that measures a company's profitability relative to the equity held by shareholders. It is calculated specifically by dividing net income by shareholder's equity, not total assets.

The formula for ROE is:

[ ROE = \frac{\text{Net Income}}{\text{Shareholder's Equity}} ]

Net income reflects the profits of the company after all expenses have been deducted, while shareholder's equity represents the net assets owned by shareholders. This metric is vital for understanding how effectively a company is using the equity invested by its shareholders to generate profits.

The statement in question misidentifies the denominator by implying that total assets, which include both equity and liabilities, are used in this calculation. This confusion leads to the assertion being false.

Focusing on other available options: the assertion that ROE is only applicable to publicly traded companies does not capture the broader applicability of this measure, as private companies can also calculate ROE for internal analysis or reporting. The claim that it depends on the financial analysis method is not accurate either; the calculation remains consistent regardless of the method, as long as it follows the standard financial metrics.