Question

Required:

Return on Equity (ROE) is used, and some say “abused” when measuring the financial performance of a firm. What are your thoughts on ROE specifically, as well as other financial ratios generally, when forming an opinion on the financial performance of a firm? Write at least 300 words.

Please don't copy from anywhere. Write in your own words.

Answer 1

Return on Equity (ROE) is a measure of financial performance
calculated by dividing net income by shareholders equity.
Since shareholder's equity is a company's assets minus its
debt, ROE is a return on net assets.
The primary purpose of calculating the ROE of a firm is
to measure how effectively the management of a company is
using the net assets to create profits.
ROE is effective when comparing different companies in an
industry group. Management or investors can compare different
companies in the same industry group by comparing the ROE of
each company to the average for the industry.
ROE has a limitation that is a large ROE ratio might indicate
uneven profits or excessive debt.
ROE is one measure of the financial performance of a company.
There are many different kinds of ratios such as profitability
ratios, leverage ratios, and liquidity ratios.
Each of these ratios measures some aspect of the financial performance
of a firm. However, an analyst has to consider different ratios, compare
industry peers, and see how a company is performing given the economic conditions.
When an analyst considers all factors, he/she can make a proper assessment
of the financial performance of the company.