Explain the concept of ROE (Return on Equity).

1.	Explain the concept of ROE (Return on Equity).
Answer» Meaning: It is the ratio of net profit after interest and tax and owner’s investment. Significance: The significance of computing this ratio is to find out how efficiently the owners funds supplied by the shareholders/owners are being used. Example, if Sushmita the owner of a grocery shop has an equity stake of Rs 70,000 in the business, she has borrowed Rs 30,000 (rate of interest is 10%). This will attract an interest of 3,000 @ 10% per annum. If the Net Profit is Rs 14,000 then: ROE=Rs 14,000/Rs 70,000 x 100 =20%

Answer»

Meaning: It is the ratio of net profit after interest and tax and owner’s investment. Significance: The significance of computing this ratio is to find out how efficiently the owners funds supplied by the shareholders/owners are being used. Example, if Sushmita the owner of a grocery shop has an equity stake of Rs 70,000 in the business, she has borrowed Rs 30,000 (rate of interest is 10%).

This will attract an interest of 3,000 @ 10% per annum.

If the Net Profit is Rs 14,000 then:

ROE=Rs 14,000/Rs 70,000 x 100 =20%

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