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Business Strategy and Accounting Basics

A company had net income of ¥12 billion, equity of ¥80 billion and total assets of ¥200 billion. Which is its ROE (return on equity)?

  1. A6%
  2. B10%
  3. C15%
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Answer: C. 15%

ROE is an indicator of how much net income a company earned relative to its equity, the funds provided by shareholders: 12 ÷ 80 = 15%. The ratio to total assets, 12 ÷ 200 = 6%, is ROA (return on assets), which shows how efficiently all assets, including those funded by liabilities, are used. ROE equals ROA multiplied by financial leverage (total assets ÷ equity); here the financial leverage is 200 ÷ 80 = 2.5 times, so ROE is 2.5 times ROA.

  • A. This is ROA (return on assets), net income divided by total assets.
  • B. This divides net income by liabilities (200 − 80 = ¥120 billion), which is not a standard indicator.
  • C. Correct. It is net income ÷ equity.
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