Question

Georgia Technology Innovations (GTI) has a return on equity of 9.54%. Explain how this ratio should be interpreted.

Answer 1

The Return On Equity ratio essentially measures the rate of return that the owners of common stock of a company receive on their shareholdings. Return on equity signifies how good the company is in generating returns on the investment it received from its shareholders.

ROE is a measure of how well a company uses investments to generate earnings growth.

ROE = Net Income/ Total Equity.

ROE is equal to Net Income (After preferred stock dividend , before common stock dividend divided by total equity (excluding preferred shares ), expressed as a percentage.

ROE is used to compare the performance of two companies in the same industry. 15-20% generally consider a good ROE.

The ratio 9.54% means the return that management earned on shareholders equity.

Generally when a company has low ROE (less than 10%) for a long period, it simply means that the bussiness is not efficient to generate profit.