What is the return on average equity?
The return on average equity is the financial metric that measures the profitability of the company in relation to the average shareholder capital. It is expressed as a percentage, equal to net income after tax divided by the average capital for a given period. The return on average capital measures how well the company uses investment to generate additional profits and can be a useful method for comparing companies in the same industry.
In diameter with its own capital, the adjustment of the return on equity is. The return on its own capital equals net income after tax divided by invested capital, measured by its own shareholders' capital. Pure income is calculated before paying dividends to the tribal holders, but after the payment of preferred dividends of shares. The difference between the two metrics occurs in the denominator. The return on equity is based on the current value of equity, while the return on average equity uses the average value of shareholders.
ReturnOst with its own capital often provides a better questioning of the company's profitability than the standard return on the calculations of its own capital. This is especially true if the average shareholder capital changes significantly during the fiscal year. The average shareholder capital is calculated by adding the initial value of the shareholder to the end of the period value and the division of two.
If the capital of average shareholders in the measured period did not change, the return on equity and the return on average with its own capital will be the same. Variations can be predicted by calculating the return on equity at the beginning and at the end of the measurement period. The change in these two numbers provides a picture of profitability change.
The positive return on average capital may mean that the company has been successful in using assets to make profits, but it is not always the case. This metric may be misleading because clean receivingm can be influenced by debt and high turnover of assets. For example, a high proportion of debt in the structure of capital may increase the return on its own capital, but neglects the risks of debt risks and repayment costs.
high yield with its own capital can also symbolize the potential for society growth, but it does not guarantee it. This means that companies may have funds to grow or pay dividends, but the high return on equity does not guarantee that the company invests these resources again. Metrics must therefore be assessed using other strategies and history of society for better understanding of the organization.