The denominator in the return on equity ratio should only include the equity accounts that belong to the common shareholders.

Question

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The return on equity ratio measures the profitability of a company in relation to the amount of equity invested by common shareholders. Therefore, the denominator should only include equity accounts that belong to the common shareholders, such as common stock and retained earnings. Other equity accounts like preferred stock and treasury stock should not be included.

The Denominator in the Return on Equity Ratio Should Only