Return on Equity

Another performance ratio used in business is return on equity. It is similar to return on assets except return on equity uses one section of the bottom half of the balance sheet. This section is technical what the owner’s have rights along with the earnings of the business entity. Recall that the balance sheet formula is:

        Assets = Liabilities plus Equity

If there are no liabilities, then the return on equity will equal return on assets as identified here:

Assets = Liabilities plus Equity
Assets = None plus Equity
Therefore: Assets = Equity

Naturally it is rare in business not to have liabilities, especially with small business. Since liabilities are normal,

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