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The return on owner's equity ratio measures the amount generated for every dollar of owner's equity
The return on owner's equity ratio measures the amount generated for every dollar of owner's equity
The return on owner's equity ratio helps a company measure a company's profitability in relation to owner's equity.
While the ideal ratio for each company depends on the overall industry and other peers, in general, the owner's equity ratio should be around 14%, but not below 10%, in order to align with the S&P 500's average. A high owner's equity ratio tells investors that the business is making large amounts of profit compared to what's been invested, signalling to them to invest more in the business. On the other hand, a low owner's equity ratio especially compared to the rest of the industry is a sign of inefficiencies and risk within the business.
When examining the current ratio, it is important to define the terms current assets and liabilities. These are assets and liabilities that the company is likely to use within the span of one year.
Important terms: Net income, and Shareholder's Equity which is the average owner's equity.
Examples
Examples
In 2019, Procter & Gamble (PG) reported a net income of $4 billion and total shareholders' equity of $47.6 billion. What is PG's return on equity?
$4 billion Ă· $47.6 billion = 8.4%
In 2017, Apple Inc. had a net income of $48,351 million, and $131,489 million in average owner's equity. Find the return on owner's equity.
$48,351/$131,489 = 0.3687
Sources
Sources
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