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Return on Equity (ROE) is one profitability ratio that is used to determine financial performance. Can...

Return on Equity (ROE) is one profitability ratio that is used to determine financial performance. Can you see any limitations with using ROE to determine the health of a startup business or business that is 1-2 years old?

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Expert Solution

Return on Equity or ROE is good profitability ratio but this ratio is good for stable business or the business which is in the market for atleast 5 year or more than that. Start up business has so many uncertainty about the product's demand in the market and their internal company management policies as well.

One startup business has to set successful marketing plan, operation plan, distribution plan, internal management's efficiency and innovations to make a business successful. It may happen that in the first year the company has a very high ROE but in the subsequent year it may encounter fierce competition and loose market share and thereby ROE will drop. Hence, for a start up business in addition to good ROE management's strategy for future, R&D , operational efficiency, marketing and distribution plans need to be taken into account to call it a successful or potential successful company.

jeff jeffy answered 1 year ago
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