The estimate of ________ combined with the firm's retention rate will indicate its growth potential.
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The estimate of ROE combined with the firm's retention rate will indicate its growth potential.
The estimate of A. ROE (Return on Equity) combined with the firm's retention rate will indicate its growth potential.
Return on Equity (ROE) is a financial ratio that measures the profitability of a company by calculating the net income generated in relation to the shareholders' equity. It shows how effectively a company is using its equity capital to generate profits. The formula for ROE is:
ROE = Net Income / Shareholders' Equity
ROE is a key indicator of a company's performance because it reflects the ability of the firm to generate returns for its shareholders. A higher ROE suggests that the company is more efficient at utilizing its equity capital to generate profits.
However, ROE alone does not provide a complete picture of a firm's growth potential. It is important to consider the firm's retention rate as well. The retention rate is the proportion of earnings that the company reinvests back into the business rather than distributing them as dividends to shareholders. The formula for retention rate is:
Retention Rate = (Net Income - Dividends) / Net Income
By combining the estimate of ROE with the firm's retention rate, we can gain insights into the company's growth potential. A high ROE indicates that the company is generating strong profits, and a high retention rate suggests that the company is reinvesting a significant portion of its earnings back into the business.
When both ROE and the retention rate are high, it implies that the company has the ability to generate profits and reinvest those profits to fuel further growth. This combination indicates that the firm has a strong growth potential. On the other hand, if either ROE or the retention rate is low, it suggests limitations on the company's growth potential.
Therefore, the estimate of ROE combined with the firm's retention rate provides a more comprehensive understanding of a company's growth potential than considering either measure in isolation.