The term “return on equity” can describe either the percentage of earnings that are attributable to equity (capital) or the amount of the firm’s debts, which is paid out to shareholders as an incentive to keep them as a part of a company. Return on equity may also refer to the difference between net tangible assets and total debts of a firm. Net tangible assets are those that are owned by the firm, such as land, buildings, machinery, and machinery and tools. Total debts, on the other hand, are those that are owed by one firm to another such as loans and mortgages.
Return on equity can help investors decide whether or not to invest in a particular firm. Since most equity is earned through the use of existing assets, it can serve as the basis for determining a firm’s future growth. A company’s ability to generate returns on its equity can give investors a better idea of how it plans to spend its money, allowing them to gauge whether a particular firm is likely to increase its profits in the near future.
Return on equity also can provide a firm with a good indicator of its firm’s earnings potential. In addition, returns on equity can help to determine the viability of a firm by providing information regarding how it can earn money in the future. Because the firm’s ability to earn returns is largely based on the value of its assets, returns on equity are also a major determinant in the value of companies.
Return on equity provides companies with a better picture of their financial health and the ability to pay down debts. It can also provide investors with a good indication of how much to pay for a given firm. If a firm’s stock price increases too much, the number of shareholders who have sold their shares may be more than the number of investors holding the stock. Conversely, if the stock price decreases too much, the number of investors holding the stock may be less than the number of shareholders holding shares.
Return on equity can help to determine the future viability of a firm by providing information regarding how much to pay for a given firm. Because returns on equity are based on the value of assets of firms, a firm’s capital structure can also affect its ability to earn returns on its equity. Some businesses have a relatively low return on equity, meaning that they do not receive a large portion of their earnings from their equity capital. Other firms have a high return on equity, meaning that they get a large portion of their earnings from their capital.
Return on equity can also help to determine a firm’s ability to pay off debts. A firm’s ability to pay down debt can depend on a number of factors, including the amount of leverage it has on the rest of its assets and the current state of its net worth.
Return on equity can also serve as a basis for determining capital gains tax since it can indicate how much of a firm’s profits are attributable to its equity and how much to its debt.