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Chapter 19
2.2 Return on equity (ROE)
ROE gives a measure of how profit a company generates for its
ordinary shareholders with the money they have invested in the
company.
Profit after tax and preference dividends
ROE = ––––––––––––––––––––––––––––––––– × 100
Ordinary share capital and reserves
ROE uses profit, which is not directly linked to the objective of
maximising shareholder wealth.
It is sensitive to gearing levels – increasing as gearing increases.
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