NOT a Source of Return on Equity (ROE)

Sources of Return on Equity (ROE)

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Question

Which of the following is NOT a source of Return on Equity (ROE)?

Answers

Explanations

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A. B. C. D.

C

Return on Equity (ROE) is a financial ratio that measures the profitability of a company in relation to the amount of shareholder equity. It is calculated by dividing net income by shareholder equity.

The sources of Return on Equity (ROE) are the factors that contribute to the increase or decrease of the ROE ratio. These factors can be categorized into two main types: profitability and leverage.

Profitability factors include Return on Assets (ROA), Gross Profit Margin, Operating Margin, and Net Profit Margin. These factors represent the company's ability to generate profits from its operations and assets.

Leverage factors include the company's use of debt and equity financing. These factors determine the amount of shareholder equity and affect the ROE ratio. A company that uses more debt financing will have a higher ROE ratio because it has a lower amount of shareholder equity, but it will also have higher financial risk.

Book value per share represents the value of a company's assets that can be attributed to each outstanding share of common stock. It is calculated by dividing the total shareholder equity by the number of outstanding shares. This factor affects the ROE ratio indirectly by increasing or decreasing the amount of shareholder equity.

Sales per total assets is a measure of the company's efficiency in using its assets to generate revenue. It is calculated by dividing total revenue by total assets. This factor affects the ROE ratio indirectly by increasing or decreasing the company's profitability and the amount of net income available to shareholders.

Therefore, the correct answer to the question is C. Book value per share is not a direct source of Return on Equity (ROE), but it affects the ROE ratio indirectly by increasing or decreasing the amount of shareholder equity.