The Calculation Of ROE: Pedagogical Issues And Integrative Opportunities

Abstract

One of the most widely used measures of firm profitability and stockholder return is return-on-equity (ROE). However, depending upon an individual firm’s financial decisions (for example, dividend policy) and an analyst’s assumptions used for the ROE calculation, the results can vary significantly. This variation can create confusion for students when the topics of ratio and financial statement analysis are presented. This paper seeks to clarify these issues, offers suggestions to improve the topic discussion in the classroom, and provides examples of additional opportunities for interdisciplinary application.