alleryStart learning →Return on equity measures what?
AThe return owners receive on their investment
BThe return lenders receive on their loans made
CThe return customers receive on their deposits
DThe return suppliers receive on trade credit
Answer & Solution
Correct answer: A. The return owners receive on their investment
1. Return on equity is the ratio of net profit to total owners' equity.
2. It measures the return that owners receive on their investment in the firm.
3. That return is a major reason for investing in a company's stock in the first place.
4. Lenders are paid interest, which is deducted before net profit is struck, so their return is not what this ratio captures.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.7 Analyzing Financial Statements_
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