Creation of the Measure
Average Return on Equity (ROE) is a financial performance measure created by dividing a company’s net income by the capital invested by shareholders (Anwar 2019) . The measure may occasionally be called return on net assets because shareholder’s equity is determined by subtracting debts from the value of a company’s assets. Net income refers to the revenue a company generates after the deduction of expenses. Often, ROE is alculated annually although companies that operate with short trading periods calculate it more frequently.
Implication of ROE
As a financial measure, average ROE displays how a company generates profits for its shareholders. Thus, a good ROE is attractive to shareholders whereas a bad one is a negative indicator. Nonetheless, whether ROE is good or bad depends on what shareholders term as normal. Because normality of ROE depends on the sector in which the business operates, ROE values must be interpreted in the light of specific sector characteristics (Weidman et al. 2019) . For instance, the utility sector is characterized by many assets and large debts on the balance sheet. This trend results in low ROE. Conversely, the retail sector is characterized by few assets and debts which cause a high ROE. A company’s ROE value may attract more investors if it is good or discourage investment when it is bad.
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Comparison with CAPSIM
The company’s results in the CAPSIM simulation portray promising figures. Through PR 1 and PR 2 of the initial week, the company’s ROE reflected -5.3% and 5.0% respectively. Whereas the value in PR1 indicated a loss to shareholders, the PR 2 figure indicated a profit. In the competition rounds, the company began the initial week at a losing ROE of -8.2% which increased to 12.7% in the second competition round. Compared with other companies, the Andrews team ranked second-best in ROE figures. This good rank implies that the company's stakeholders are receiving positive returns on their investments. Therefore, whereas the company’s average ROE measures are variable, its shareholders can be confident of the management’s ability to invest funds wisely and generate income.
References
Anwar, Yuli. 2019. "The Effect Of Return On Equity, Earning Per Share And Price Earning Ratio On Stock Prices". The Accounting Journal Of Binaniaga 4 (01): 57. doi:10.33062/ajb.v4i01.314.
Weidman, Stephanie M., Daniel J. McFarland, Gulser Meric, and Ilhan Meric. 2019. "Determinants Of Return-On-Equity In USA, German And Japanese Manufacturing Firms". Managerial Finance 45 (3): 445-451. doi:10.1108/mf-07-2018-0305.
